Want to set yourself up in a home for retirement but you're strapped for cash? You can use your IRA — but here’s why you probably shouldn’t
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When retirement is on the horizon, it’s natural to start thinking about where you want to spend your later years. In fact, you may even be tempted to buy a house now to set yourself up for the life you want as a retiree.
Of course, this is also a time in life when you may have lots of financial obligations, from sending kids to college to saving for that imminent retirement. If you’re cash-strapped but have built up a pretty good balance in your IRA, it’s natural to wonder if you can use that money to purchase your future retirement home.
The answer is that you can, and there are a couple of ways to do it — but both have some pretty significant downsides. Here are the options, including how you can invest in real estate without needing to buy and manage a property.
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Buying a house within your IRA
You don’t have to keep your IRA with a brokerage firm and invest in equities. You can open a self-directed IRA and buy other assets, including real estate.
There are companies that will set up a self-directed IRA and act as the custodian for you, often for a hefty fee.
Once you’ve opened and funded your self-directed IRA, you can make a home purchase within it. However, there’s a really big catch — you can’t engage in any self-dealing with your IRA funds. That means you (and your family) can’t personally benefit from the investment property.
New ways to invest in real estate for your retirement
Buying a home is far from the only way to gain exposure to real estate as an investor.
Both the rental and commercial markets are worth a look too, especially if you don’t want to deal with the work and hassles of managing a property and tenants.
If you want to buy property in the U.S., the national average cost is $495,000. For most, a 40% down payment on that price tag just isn’t feasible. And that could mean you’re looking at a mortgage rate around 6%.
Then there’s the added cost of maintenance and upkeep. That averages at around $18,000 a year, which is steadily climbing, and already 26% higher than four years ago. You can circumvent that costly mess with Arrived, a Bezos-backed platform that allows investors to buy stakes in rental homes and vacation rentals without the hassle of homeownership or tenant management.
With Arrived, you can pick from a curated selection of homes and invest in your own share. While Arrived doesn’t offer a Roth IRA, it accepts investments from a checkbook IRA. You’ll also avoid any tax on rental income you earn, or appreciation on the investment.
You can start investing in rental properties with just $100.
Commercial real estate is one example of a reliable income stream — and you don’t need to invest an arm and a leg to tap in. First National Realty Partners (FNRP) allows accredited individual investors to access institutional-quality commercial real estate investments — without the leg work of finding deals yourself.
You can even invest through a Roth IRA — meaning, you’ll receive tax-free payments and distributions that won’t be added to your combined income calculation.
FNRP has developed relationships with the nation’s largest essential-needs brands, including Kroger, Walmart and Whole Foods. You can engage with experts, explore available deals and easily make an allocation, all in one personalized portal.
Read more: Cost-of-living in America is still out of control — use these 3 ‘real assets’ to protect your wealth today, no matter what the US Fed does or says
Self-directed IRAs
If you’re interested in self-directed IRAs, it’s important to speak to an expert to ensure you understand the rules and red tape that come with this kind of investment. Speaking to a financial advisor about your options — regardless of your retirement plans — is the best place to start.
With Advisor.com, an online platform that connects you with vetted financial professionals, you can get matched with a list of experienced financial advisors who are best suited to help you develop a plan to achieve your home ownership or retirement goals.
Just answer a few quick questions about yourself and your finances, and then view advisors’ profiles, read past client reviews, and schedule an initial consultation for free with no obligation to hire.
There’s a major downside to buying property with a self-directed IRA: You can’t live in the house or let family members live there, even if they pay rent. You can’t use it for personal reasons under any circumstances at all. You can’t even buy furniture for the property from your own funds; it all has to come from the IRA. Plus, if you do decide to live in the house upon retirement, you’d have to take the property as a distribution and pay taxes on the distribution.
This could leave you with a huge bill, especially if the property has gone up in value. The tax bill could be too big for you to afford without selling or mortgaging the property.
As if that wasn’t enough reason not to do this, the money you’ve used to buy the house won’t be available for your use in retirement, and it won’t be invested in other things that help your account grow.
In this situation, you’ll also be raiding your retirement account of funds that could otherwise remain invested in equities that grow in value over time. This reduces the balance you end up with and leaves you with less to live on. Yes, you’ll have the house — but your money will be tied up in it.
The bottom line is, if you’re nearing retirement, you should only buy a home if you can afford a down payment, maintenance costs, and mortgage payments without jeopardizing the nest egg you need for your golden years.
A different way to invest in home equity
Rather than tapping your IRA for a cozy nest to retire in, why not use your savings to build wealth that can give you more options in retirement?
Real estate investing platforms can help you save money for a down payment, retirement, or any other financial dream.
Similar to the self-directed IRA plan, but with fewer headaches, Cityfunds allows you to invest in residential properties in top U.S. cities — like Denver, Austin, Nashville and Miami — without having to drain your account to purchase a home outright.
You can invest in the housing market of a city you love for as little as $500.
The company allows investors to place their funds in diversified portfolios of owner-occupied homes. In exchange for the cash, Cityfunds secures an interest in the home’s future value. As the home value appreciates, so does the value of Cityfunds equity investment, alongside the homeowner.
If you’re hoping to settle down to a new home in retirement, it may be best to focus on building your savings now, and buying later. More funds means more options, so you can build the best retirement lifestyle possible.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.