Real Estate Investing to Boost Retirement Savings

Hello Hampton Roads,

I recently read this CNBC article about what the average family has saved for retirement and it was eye-opening!  The data from the article is from the Economic Policy Institute's report on The State of American Retirement and here are some of their findings:

  • Mean retirement savings of families between 44 and 49: $81,347
  • Median retirement savings of families between 44 and 49: $6,200
  • Mean retirement savings of families between 50 and 55: $124,831
  • Median retirement savings of families between 50 and 55: $8,000
  • Mean retirement savings of families between 56 and 61: $163,577
  • Median retirement savings of families between 56 and 61: $17,000

The fact that there is such a huge disparity between the mean and median numbers shows that the wealth gap is growing.  Seeing these numbers made me think of ways to boost savings and one way of doing this is by investing in what you know and for me, that's real estate.  Depending on your goals, investing in real estate can be used for cash flow with rental properties or for capital growth by flipping houses.

A way to boost retirement using real estate is with a Self-Directed IRA (SDIRA).   A SDIRA is a vehicle that can be used to invest tax advantaged dollars in a variety of alternative investments such as real estate, metals, tax liens, notes, and even horses and livestock!  The key is finding the right custodian to work with who can hold the investments you are interested in on your behalf. There are a number of companies to choose from so its important to do your due diligence and find out which one works best for you.  Some of the more popular companies are Equity Trust, Kingdom Trust and Pensco.

To fund the account, the maximum contribution limits for 2018 are $5,500 if you are under 50 and $6,500 if you are 50 or older.  Another way to fund the account is to transfer any IRA funds you currently have to SDIRA account you set up.

A major benefit of the SDIRA is the flexibility it offers in investment choices and the potential for large, tax deferred, capital appreciation. For example, if you were to purchase an investment home with a SDIRA with the intention of flipping it, all profit from the sale would go directly into your account with no taxes owed until you withdraw.  If you open a Self-Directed ROTH IRA, then everything you withdraw is tax free!

A SDIRA is not without it's risks and there are specific rules when investing in real estate. When investing in real estate, here are a few key things to keep in mind:

  1. Title must be held in the name of the custodian or trustee and never held in the name of the purchaser directly.  
  2. In addition, all payments must come from the custodian and never paid personally.  All checks (for example rent checks from rental properties) must be made payable to the custodian.
  3. When purchasing property, the earnest money must come directly from the SDIRA.
  4. You cannot sell or buy a property from a disqualified person. A disqualifed person is you, your spouse, employer, and someone who in is related to you in linear ascent or decent--your parents, grandparents. or your kids and their spouses or grandkids and their spouses.  You also cannot purchase from any business entity where you have 50% or more ownership directly or indirectly.
  5. No self-dealing allowed.  This means that you cannot personally gain from the asset while it is in the account.  Examples of these types of prohibited transactions are living in the property, using it as a vacation home, or allowing family members to live in the property. Paying yourself a salary or property management fee from the IRA, taking a loan from the IRA, or using the property in the IRA as collateral for a loan. Don't do any work on the property personally, including sweat equity.

This is not an exhaustive list, so it is best to check with your account custodian and accountant for specific questions you have about what you can and cannot do so you don't expose yourself to unnecessary penalties and fees. 

Whether or not you choose real estate as your alternative investment of choice to boost your retirement savings, I hope this blog inspired you to make a plan for a prosperous future!

Thanks for Reading,

View Liz Schuyler- CDPE, SFR, e-PRO's profile on LinkedIn _________________________

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