Have you every heard of leveraging your Roth IRA to invest in real estate acquisitions? This may in fact be the most powerful way to build wealth for your future retirement. Investing in real estate right now (if you know how to do it correctly) can provide you with enormous gains, especially if you have the cash to do it.
First, let’s go over the definition of a Roth IRA and how one can be used to leverage real estate investments. Then we’ll go over the necessary Roth IRA rules you need to know about that apply to real estate acquisition. I’ll even tell you how you can start your own Roth IRA and what it takes to do so. Sounds good? Alright, here we go.
Back in 1974, the Individual Retirement Arrangement/Account (IRA) was created to help people save money for their retirement. The IRA was basically a trust account that allowed people to save their money without having taxes taken from it before they retired. A few years later, people were allowed to deduct their IRA contributions from their income during tax time. This way, no taxes would be paid on any IRA funds at all until it was withdrawn during retirement; then it was taxed just like any other ordinary income. An advantage of this was most people usually were in a lower tax bracket when they retired, meaning they would pay fewer taxes on the funds they took out of their IRA account. This also made people’s money able to be grown instead of taxed, which would lead to substantial growth in the long run.
Now onto the definition of a Roth IRA. Created in 1997 by Senator Roth of Delaware, the Roth IRA is a tax-free savings plan. All contributions are made with after-tax dollars and these contributions were not allowed to be deducted from your yearly income. The main difference between a traditional IRA and a Roth IRA is the fact that money is not taxed when it is taken out. In fact, no taxes are paid on the interest, dividends, or gains — ever. This is only true if you don’t take any funds out until your at least 59 1/2 years old. You also have to have the account for at least 5 years. Another benefit of a Roth IRA is their is no Required Mandatory Distribution (RMD) like there is with a traditional IRA. With a Roth, you can keep contributing to the account for as long as your like (even past the age of 70), all tax free.
Now, how can a Roth IRA be used to generate huge profits with real estate investments? Let me explain this process to you using a simple example.
If you bought a piece of real estate with cash and sold it at a later date, you would have to pay taxes on that transaction, often up to 15% of your entire profit. This tax is called capital gains tax. So if you generated a profit of $20,000.00, that would mean you’d have to pay $3,000.00 in taxes for that transaction. Imagine what you could do with this money!
But what if I told you there’s a way for you to keep that $3,000.00? Hey, what do you know! If you put the whole $20,000.00 in a Roth IRA, you could keep ALL OF IT and invest that into more real estate. So if you bought a piece of property for $40,000.00 and you sold it for $60,000.00, you would get to keep that whole sum of money with a Roth IRA, which you could then use to invest in more real estate acquisitions. Soon enough, you’ll be able to buy two properties at one time. Do you see the power in this? Every time you make a profit, your IRA grows bigger and bigger. Talk about smart leveraging of your money- all with real estate investments!
Now about the Roth IRA rules having to do with making money with real estate acquisitions. Roth IRA rules state that your prohibited from purchasing real estate property for anyone in your immediate family or linear descent. But if you acquire a piece of real estate property and rent it out to a complete stranger because your in it to make a profit, that’s perfectly alright. You are also not allowed to borrow money from the accounts and you cannot use your Roth IRA funds as a security for a loan.
What does it take to own a Roth IRA? You can contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income (or “earned” income) is less than:
*$169,000.00 if you’re married filing jointly
*$116,000.00 if you’re single, head of household, or married filing separately and have not live with your spouse at any time during the year.
Now, you know what the definition of a Roth IRA is, you know about the Roth IRA rules that apply to real estate investing, and you know what it takes to get one yourself. The only thing left for you to do is find the right real estate investing vehicle to work with.