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August 19, 2021
Today we’re going to talk about the five benefits of buying real estate inside your IRA or 401k.
The number one benefit of buying real estate inside your IRA or 401k is that real estate is tangible. It’s much different than owning a stock or a piece of a mutual fund inside of your IRA, because a stock is not necessarily tangible.
If your IRA invests into Walmart stock, or some business that’s publicly traded, and that company goes belly up, you’re left with nothing. There’s nothing to fall back on. There’s no safety net with that type of investment.
However, if your IRA or 401k owns real estate, it is an asset. You can drive by it. You can touch it. You can feel that it’s tangible. It’s not going anywhere. So, many people like to hold real estate inside of their retirement portfolio, for the simple fact that it’s tangible.
The second benefit to buying real estate inside of an IRA or 401k is that real estate often comes with multiple streams of income.
What I mean is that it’s not like the stock market, where you have to buy your stocks low and then sell them high.
With real estate, you obviously want to buy it low and maybe sell it at the high point, or otherwise appreciate. But even if it doesn’t, you still earn rent – if it’s a rental property.
When you’re talking about your retirement asset, it has to be an investment. Oftentimes your real estate assets are generating cashflow. That’s aside from just the appreciation of the asset.
There are other things that also create cashflow. Some creative investors take the real estate that’s owned inside of their IRA and flip it and seller finance it to an end buyer. This can generate an income through a down payment, which turns that property asset into a note asset.
So, real estate inside of an IRA gives you multiple streams of income that go back to your IRA tax deferred, or completely tax-free.
The number three benefit to buying real estate inside of an IRA or 401k is that you pay absolutely no capital gains tax.
There is no tax that you have to pay when you buy and sell real estate inside of an IRA or a 401k or a qualified plan. It’s much different than when you buy real estate as an individual.
In a lot of cases, if you’re buying investment property as a person or through your own LLC, you still have to pay capital gains tax and other tax on the rental income that’s generated from that investment.
The beautiful part of investing inside of an IRA is that you don’t have to pay that tax.
All of the investment growth is either tax deferred, or in some cases – depending on the IRA – it’s completely tax-free. And you can buy and sell as many investments as you want, and pay no capital tax ever.
The fourth benefit of buying real estate inside of an IRA or 401k is that it’s a socially conscious investment.
And what I mean by that is when you are investing your retirement, ask yourself the question: What else are my investments doing?More specifically, on a social level, on a community level, and aside from just giving your IRA or you a set rate of return.
When you invest in a mutual fund, it’s a passive way to invest in for the most part.
Most Americans don’t even know what’s in the mutual funds they own in their retirement account.
Ask the average American, “what companies do you own in a mutual fund?”
Very few people will be able to tell you. Or, if they can tell you the companies they own in a mutual fund, do they know the CEOs of those companies? Do they know if those companies are in line with their political or ethical intentions or on a moral level?
Think about using your IRA or 401k to hold that investment instead of a stock. If you invest in that property and you fix it up inside of your IRA, you’re doing your IRA a service by making a good investment. You’re also doing your community a good service by taking an ugly property and making it pretty, then putting it back on the market and providing the American dream to somebody.
The fifth benefit to owning real estate inside of an IRA or a retirement plan is the ability to pass on tax-free wealth to your next generation.
Think about this. About 98% of Americans who have a retirement plan are invested in stocks, bonds, mutual funds, and CDs. When they pass, those IRAs are turned into inherited IRAs for the spouse or the children, or sometimes even grandchildren.
How often do we see the beneficiaries quickly sell everything inside of that IRA and exhaust all of the wealth accumulated by the deceased? It’s very common. It’s very easy to do when you own things like stock, because they’re very easy to sell, especially public stock.
But, when you own real estate inside of an IRA, and you pass that real estate to heirs, it typically doesn’t go anywhere. It just moves into an inherited IRA to your beneficiaries. So, it’s a good way to preserve wealth, because it’s not easy to sell rental property outside of an IRA.
Your beneficiaries can spend the cash flow that was generated from the real estate, but the assets tend to stay in there because they’re tangible assets.They can appreciate. They can continue to grow in a tax-free manner, not only for yourself, but for your beneficiaries, as they reap the rewards of tax-free growth inside of their new inherited IRA.
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