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 Investing In Real Estate with an IRA

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Jeffery Desich - Jeffery Desich is general principal at Mid Ohio Securities. A special asset IRA custodian which allows its clients to use their retirement funds to invest in all forms of real estate investments permitted by the IRS. Founded in 1974.

 Most Real Estate Investors Aren’t Aware That
They can use their IRA funds to invest in real estate. More importantly, they don’t fully understand the incredible wealth building powers IRAs hold.

IRAs invested in low interest CDs or government bonds will grow exponentially due to the tax deferred or tax-free status that IRAs hold. What makes this tool so much more powerful to real estate investors is the fact that they are able to achieve substantially greater returns than most stocks or mutual funds through their current investment strategies. When you combine the powers of an IRA with the knowledge and incredible returns of a real estate entrepreneur, you create a situation capable of tremendous growth. By creating, transferring, or rolling over a 401(K) to a self directed IRA, you will have complete control on how it is going to be invested. In fact you can use your current investing style with your retirement funds. Imagine being able to complete real estate deals almost exactly as you are currently doing them now, but gain the added advantages IRAs and their tax deferred/free status offer. As I mentioned, an IRA is one of the most powerful wealth building tools available to real estate investors. But why is this? What can an IRA offer that my present investing strategies cannot? Throughout this article we will cover these points step by step. As you will soon see, an IRA can offer real estate investors much more than just a way to save for your retirement.

 The Power of Tax Deferred Compounding Interest
One of the greatest features of the IRA is that it allows investors to enjoy the true power of tax deferred compounding interest. What is compound interest? Compound interest is basically interest on interest. For example, when you make an investment and receive a return, you are able to enjoy interest on both the investment principle and the earnings you have accumulated. The additional interest you made on your profits is compound interest. Compounding can occur with any investment you make, but the “true” power of compounding is obtained when you make an investment in a tax-deferred environment. By taking advantage of an IRAs tax deferred status, you do not have to pay tax immediately on the earnings. Thus you are able to enjoy the power of compounding on all of your profit and not just that which is left after tax. Lets look at an example, which will illustrate the power of a tax-deferred environment.

 “The Most Powerful Force on Earth is Compounding Interest” -Albert Einstein
In this example, we have a man who is 35 years old and contributes $2,000 annually to his traditional IRA, until the age of 65. These thirty contributions total $60,000. Assuming a 10% annual rate of return the individuals IRA at 65 will be worth approximately $400,275.

Now, let’s look at the same investment made without the IRA’s tax deferred environment. Having the same assumptions as above, except the individual’s investments would be subject to an annual tax rate. The total value of the account would be just $227,220. A difference of over $170,000

 “With the Roth You Will Never Pay Income Tax”
Remember this example was based on a traditional IRA. A traditional IRA is funded with before tax dollars, which in most cases is tax deductible. To increase this power one step further, an individual could invest using a Roth IRA. With the Roth, contributions are made with after tax dollars so you don’t receive a deduction, BUT your earning will not be taxed when you make a qualified distribution. Imagine being able to do the same deals you are currently making but receiving your profits tax deferred or tax free! All by just using your IRA to invest.

 Reduce your Taxable Income
In addition to letting investors experience the “true” power of compound interest, many IRAs can reduce your taxable income. As we had mentioned before, in most case contributions to a Traditional IRA may be tax deductible. If you are interested in receiving greater deductions, as well as contributing more than $2,000 to an IRA, a SIMPLE or SEP IRA might be right for you. With these plans a real estate investor can contribute up to $25,500 annually to their IRAs. Lets look at an example of how a family could considerable lower their taxable income utilizing IRAs. For more information on these accounts, or any topic in this article, please visit The Smiths are a family of four living in the Midwest. John Smith has a business, which rehabs houses and then resells them. He employs his wife and their two children, between the four of them the family has a $70,000 annual income. In order to maximize their contributions to an IRA and lower their taxable income they have chosen to have both a traditional IRA and a SIMPLE.

Smith Family $70,000 Combined Annual Income

John Annual Income
Taxable Income

Son Annual Income
Taxable Income

Wife Annual Income
Taxable Income

Daughter Annual Income
Taxable Income

Total Family Taxable Income $38,000.00
Total Amount Contributed To IRA $32,000.00

By utilizing multiple IRAs, the Smith family has been effectively able to lower their taxable income by 54%. More importantly, the family has been able to contribute $32,000 to their IRAs. Now that they have these funds available, in the tax-deferred environment of an IRA; the Smiths can optimize their real estate investing strategies.

 Gives You Asset Protection
Unlike qualified plans, IRA regulations pertaining to asset protection are created at the state level. In most states IRAs have considerable protection against most creditors, excluding the IRS and your spouse. For more information on this subject it would be advisable to research the regulations, which apply to you in your own state.

 Provides a Great Estate Planning Tool
Most investors are attracted to the immediate advantages an IRA offers such as tax deferred/free compounding and the ability to reduce their taxable income. What they don’t realize is that IRAs are excellent tools for planning the future. Whether it be, you have a newborn in the family and would like to give them a head start or you are enjoying your retirement and you would like to plan your estate, IRAs offer extreme advantages. In order to illustrate these benefits we have two examples.

 “Who Wants To Be a Millionaire?”
Our first example. You can make your child or grandchild a millionaire with just $2,000. The numbers don’t lie, if you contribute just $2,000 at age 1 to their Roth IRA and achieve an annual rate of return of 10% the account at age 65 will be worth $1,078,000 Income Tax Free!

 “What Type of Returns do you Make in Real Estate?
10%, 20%, 30%…?”

Our second example. By structuring your IRA correctly you can leave your loved ones with a considerable amount of money. In this example a relative has left their 12-year-old granddaughter with a Roth IRA valued at $300,000. By achieving an 8% annual return and taking just the minimum annual distributions, this IRA will be worth almost $12,00,000 over her lifetime. Because the granddaughter was the beneficiary of the Roth IRA, she is required to take the money out over her life expectancy. The chart below illustrates what her minimum required distributions would be over her lifetime. Remember, if she wanted to she could withdraw all of the funds at anytime.

12 Years Old - Life Expectancy = 69.70 Years
First Year Min. Required Distribution $4,304.16

Age 12 - Min Req Dist - $4,304.16
Age 20 - Min Req Dist - $7,942.67
Age 30 - Min Req Dist - $17,054.77
Age 40 - Min Req Dist - $36,581.79
Age 50 - Min Req Dist - $77,682.19
Age 60 - Min Req Dist - $161,128.57
Age 70 - Min Req Dist - $421,798.91
Age 80 - Min Req Dist - $1,164,399.05

Total Distributions - $11,975,293

 Why haven’t I heard of this before?
The reason most real estate investors don’t know this opportunity exists is because most IRA custodians do not offer truly self directed IRAs. Often times if you ask your current custodian/trustee “can I invest my retirement funds in real estate” they will say, “You can’t do that, that is not allowed.” Which means you can’t do that at their financial institution. These Custodians/Trustees will only allow you to invest your funds in their approved list of investments such as CDs, Stocks, and Mutual Funds. Mid Ohio Securities allows its clients to invest in all forms of real estate as well as any other investments not prohibited by the Internal Revenue Service.

Some of the investments you can make with your truly self directed IRA:
· Single family homes
· Apartments
· Commercial Property
· Mobile Homes
· Raw land
· Mortgages
· Real Estate Notes
· Tax Liens

For more information on any topic we have talked about in this article or Real Estate IRAs in general please visit our web site at or feel free to contact Jeff Desich at

Posted: 4/20/2001 5:17:14 PM

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