Making an investment using the funds available at IRS is perhaps one of the smartest real estate/investment moves in your life. Additionally, you can enjoy tax advantages if you follow the rules set by the IRA. The IRS is by the far the most accessible and easiest source in terms of funds because you do not have too much tiring paperwork requirements. You can use the IRA fund for your real estate investment as you can transfer it into your 401k account, or apply for a loan against it. Planning for your retirement through such an investment would be the first step in securing your future when you retire.
Have a look at the precautions and actions you must take to invest in real estate
Get in touch with your retirement administrator as that person would be the best judge to check whether your IRA is eligible for real estate investment. Now here comes the cinch: Certain custodians of the IRA do not allow for real estate purchase and the 401k gets restricted by law. However, your administrator would be able to give you directions on how to move to your funds lawfully.
Your next move should be to research on the loan regulations. If you cannot borrow against your IRA, then probably you can borrow at least half the value, and usually it is up to $50,000. You are allowed to accept cash from other sources if this amount is not enough, but you may not receive the tax advantages. Similarly, you have the freedom to buy or sell real estate if you are interested in the flipping business, but find out how much ‘flips’ you can do in a year. The profits that you earn from such transactions would be tax-deferred. This way you can grow your IRA and earn tax benefits.
Buying rental property
It is possible to use 401K funds to buy income-generating real estate (buying a property with the intention of giving it out for rent). The rent is tax-deferred as well. Yes, you don’t have to pay taxes for the rent. This is because rent is considered as ‘return on investment’ and not as your ‘income’.
When you purchase real estate using your IRA fund, you need to monitor the cash flow. As all the funds for purchasing the property should come from the IRA, the sales proceeds of the property must be returned to the IRA. Do it this way and you will not have to go through the issue of tax ramifications.