If you have an IRA Account, you don’t need cash to invest in real estate.
True. Many of our investors are buying undeveloped land in the path of development using their under-performing IRA accounts. In most cases, clients open a Self Directed IRA account with a new custodian in order to invest in alternative options, such as land. Companies like Fidelity, Lincoln, T. Rowe Price, Morgan Stanley, etc., only offer traditional stocks, bonds, and mutual fund options for their IRAs. These investment firms do not offer actual land investment opportunities unless they are in the form of a Real Estate Investment Trust (REIT). As a land owner, you will own title to the property and therefore need a Self Directed IRA custodian who can hold the land as an asset in your IRA account. There are no tax consequences or penalties if you follow the guidelines. The process is simple: identify the custodian you would like to use, open a new IRA account, and transfer funds from your old custodian.
What are the benefits of buying land within an IRA Account?
There are several benefits to buying land within your IRA account. First, there is zero cash out-of-pocket. Second, if you are concerned about your lack-luster rate-of-return on your IRA account compared to 10-years ago, land is an alternative way to invest outside of the volatile marketplace. Third, you are able to defer or eliminate taxes on the growth of your land investment depending on the type of IRA account you have. Growth in a Roth IRA, for example, is tax free if you follow the IRS guidelines. You should consult with your tax advisor or Self-Directed IRA associate to see if using your IRA account is the best option for you. Many of our clients own properties in both cash and in their IRA accounts so they have access to the revenue generated at different times in their life, based on their age and specific needs.
I don’t have an IRA Account. Can I take money from my 401(k) to invest in land?
It depends. If you no longer work for the same company where you were contributing to your 401(k), in most cases, YES! The time to invest in land is now. Transferring your 401(k) funds to a Self Directed IRA account is simple and easy. You have two options to consider:
- Traditional IRA:
You pay no taxes on the funds at the time of transfer. You will pay taxes when you begin withdrawals from the account, normally after the age of 59 ½-years.
- Roth IRA:
You pay taxes on the funds (partial or in full) at the time of transfer. You start by opening a Traditional IRA account, then converting that account to a Roth IRA account. Because you pay the taxes now, any profits from land investing within your Roth IRA account will not be taxed in the future. This is a great idea for people who can claim the transferred amount as income on their taxes and pay up front on a smaller amount versus paying in the future on the larger amount after years of growth.
Now, if you STILL work for your company where your 401(k) resides, there is a possibility that you can do an in-service, non-hardship withdrawal from your 401(k), 403(b) and 457 plans to a Traditional IRA account or Roth IRA account. This is a great option if you have a large amount of funds in your plan and limited investment choices for diversification.
Speak with your company representative to see if your plan has been customized to allow an in-service withdrawal to a Self Directed IRA account. If you don’t have the option and there is enough support from the employees, the plan can be amended to have this option added.