Real Estate IRA - Real Estate Pension Plan

Use a Real Estate IRA or a Real Estate Pension Plan (tm) to build your wealth tax deferred.

Even though real estate is permitted as an IRA holding, setting up the Real Estate IRA is still very tricky. For starters, to even remotely to consider this investment, you have to have a pretty sizable IRA. After all, a $4,000 annual contribution ($4,500 if you'll be age 50 or older at the end of the year) probably won't buy you much more than a funeral plot. And pooling money from both inside and outside your IRA could cause problems with the IRS since you are commingling funds, says Mike Dillon, a Investment Advisor with wealth managment firm, Second Look Financial in Scottsdale, Az. Also if you already own the land, you'll have a hard time transferring it to your IRA, since you would essentially be selling the asset to yourself and the IRS prohibits any kind of self-dealing transactions.

But wait, there's more: Even if you were able to make a decent real-estate investment with your IRA money, keep in mind all the repairs and renovations would also have to come out of that account. A lot of real estate is a money pit and it's tough to maintain real estate unless you have a lot of backup money.
Your other major problem will be finding a custodian, which all IRA accounts must have. Since custodians have a fiduciary obligation to make sure you have appropriate investments, most brokerages and mutual-fund companies don't want to be burdened with the liability and administrative issues connected with wackier types of IRA investments, says Joe Phillips, a Certified Estate Advisor at Second Look Financial, an Investment Advisory Firm in Phoenix and Scottsdale. We contacted Vanguard, Fidelity, Schwab and TD Waterhouse to see if they would allow real estate to be held in an IRA. The universal response? No way.

Now, we certainly aren't saying that investing in real estate is a bad idea. Real estate held outside your IRA could make sense for several reasons. For starters, as you probably know, real estate can be a good way to diversify since it tends to move independently of the stock and bond markets. Also, if you hold on to the property for a number of years, you'll be taxed only at the long-term capital-gains rate, which is no more than 20%.

But if you're still interested in adding a real-estate component to your IRA, consider investing in a REIT, a company — usually publicly traded — that manages a portfolio of real estate. Holding these kinds of investments is comparable to holding actual real estate, with the added benefit of having a professional manager at the wheel. Alternatively, you could consider investing in a real-estate mutual fund. For some picks, see our latest real-estate fund screen.

To hear all about how the the Real Estate IRA or the Real Estate Pension Plan© works call the Real Estate Retirment Account©