Believe it or not… there are a number of IRA-allowable investments that many people don’t know about. One of the first things investors need to figure out is whether they are risk averse, risk neutral, or risk loving.
Some low-risk IRA investments have low rates of return. People who take more risks have the potential to earn more. It’s kind of a reward for being a “risk taker.” The old saying goes…”Higher risk means higher reward”.
IRA-allowed investments that are accompanied by the lowest risks include bank certificates of deposit, because they’re FDIC-insured, and treasury bills, because you’re actually investing in the federal government. They are not likely to go out of business, although they sometimes operate at a loss, you will not “lose” your money. It just won’t “grow” very quickly.
Fortunately, some low-risk IRA investments can be very profitable! Analysts assess risks, in part, based on the historical earnings of a particular type of investment. Real estate is a type of investment that, for the most part, has always done well. Let’s face it…they just don’t land anymore.
Of course, people have made some bad real estate decisions over the years. I know of one person in particular who bought some undeveloped lots in Florida. The proposed subdivision was never completed and he was unable to sell them for many years. So of course you have to be careful what you buy.
Under the law, IRA-allowable investments include vacant lots, but they also include single-family homes, apartment buildings, duplexes, office buildings, and shopping malls. So, you could buy many different things. The possibilities are numerous.
When it comes to real estate, the best low-risk IRA investments are cash transactions. The account can borrow from a bank to make a purchase, but only the property can be used as collateral, not the account itself.
The downside to using financing for IRA-allowed investments has to do with taxes. When financing is used, profits and rental income are subject to unrelated business income tax or UBIT for that tax year.
One of the reasons people choose real estate as low-risk IRA investments is because of the tax advantages. Those can be negative by UBIT.
Only property that you and your family members are not personally using is an IRA-allowable investment. The account cannot contain the deed to the house you live in or the building where your office is located, for example.
Shares that are not easily liquidated are not permitted IRA investments. For example, you can’t have antiques, collectibles, or personal items like fur coats on your account.
IRS rules are basically designed to protect your future. Knowing that social security payments are inadequate and that most companies no longer offer pension plans, it becomes the individual’s responsibility to save for retirement.
They also want future retirees to invest in relatively low-risk IRAs. For example, that vintage car you’re looking at could be worth a fortune, but it could be very difficult to find a buyer and hard to insure for its appraised value. If it were damaged in any way, you could easily lose money on an investment like that.
Real estate, on the other hand, is relatively easy to liquidate or resell. But while they are permitted IRA investments under the law, many custodians don’t offer their clients the option. But, with a little luck and the right custodian, you can grow your account faster than you ever thought possible.
Do yourself a favor and learn more about investing in real estate with your IRA today. I promise… you’ll be glad you did!