Should you use a self-directed IRA for real estate investing? 👉👉 Want the Exact 🏦Privatized Banking🏦 Strategies Our Clients Are Using to Build Financial Freedom? CLICK HERE For the #1 Secret: 👉 👉 Listen to The Money Advantage podcast: Real estate is one of the most powerful assets that will do this for you because you're putting your dollars to work in something that's producing an income for you, meaning you're not trading time for dollars. A lot of times we get this question, should I use my self directed IRA to invest in real estate? And I'm going to say, no, that is a really bad idea, and this might be the first time that you're hearing this because a lot of people talk about how amazing it is to use one tax shelter to invest in something that has another tax shelter. I'm going to credit Tom Wheelwright of the Rich Dad Advisor team for this idea. It's like adding integers. Remember back in high school math where you learned that multiplying negative one, times negative one equals positive one. If you take a tax deferral vehicle like a 401k or an IRA or a self-directed IRA, this is where you are not paying tax on money today; you will pay tax in the future when you take that money out. Real estate as a standalone investment also offers tax advantages and most specifically depreciation. So if you say cash flow $10,000 a year, but you depreciate $15,000 on that property, you are at a loss of $5000. You can use that operating loss in the real estate and apply that against all of your income, and f you're in a 40% tax bracket that's $2,000 of tax savings. However, when you purchase real estate inside of a self-directed IRA, you no longer have access to depreciation, so it doesn't exist for you. It wipes out the tax advantage of investing in real estate, which is a really good reason to invest in real estate. On top of the cash flow, leverage, the hard asset that you're putting your money into that's going to have a value of some kind, no matter what market you're in, and the appreciation that you might earn in that asset. Those are just a few of the benefits of real estate. Instead of looking at the self-directed IRA route, let's talk about what we should do instead. If you already have money, maybe from a 401 or an IRA, absolutely move that over, into a self-directed IRA and use that money to invest in real estate. However, I would say we don't continue funding, self-directed IRAs as an ideal tool to invest in real estate. You want to think about putting your capital somewhere else because here's another thing; you can't usually leverage within the self-directed IRA, meaning you're going to have to pay cash for those properties. If you pay cash, your returns are going to be much lower, than if you had used leverage or debt financing. So when you put your money into the self-directed IRA, not only are you decreasing your returns because you can't use leverage, you're increasing the tax that you pay because you can't use depreciation, and you're also decreasing your control. What do I mean by control? You don't always have access to all of that capital within the self-directed IRA. If you wanted to pull it out and use that money, you're going to pay taxes and penalties on that cash. But then when you turn 59 1/2, you do have access to all the capital. Then at age 70 1/2, there's another requirement that you have to take a required minimum distribution; but what if all your capital is tied up in a real estate asset? You're not going to be able to sell off increments to get those required minimum distributions so you may have to end up dumping, the real estate investment, to be able to take those distributions. In general, it's not the ideal place to have control and maximize your tax savings so that you can increase and maximize your cash flow. The better way would be to put your money somewhere that is safe, that is growing, and that's liquid and available for you to use. That's why we advocate using, a whole life insurance policy, better known as infinite banking because you're putting your money, into the life insurance policy, the cash value is growing with interest and dividends, you're able to borrow against that cash value, put it to work in the real estate asset. Take advantage of all the tax benefits of real estate and still be earning returns in the life insurance at the same time. You're double dipping, and you're not cutting off your tax advantages. #selfdirectedira...(read more)
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