If you are one of the millions of Americans wise enough to regularly add to your retirement account, you understand the importance of planning ahead. However, unless you that process includes real estate, you need to reevaluate your strategy. You may not be tapping into the full power of this relatively UNKNOWN federally-approved way to save on taxes and accumulate wealth. Kevin Kirkwood helps many Arizona residents utilize this opportunity.
Make Your IRA the Landlord in AZ:
Many savvy investors understand the role real estate ownership plays in any well-diversified portfolio. However, only a small number of individuals realize that their retirement accounts, in particular self-directed IRAs, can purchase and own real estate and accumulate tax-deferred earnings.
Of course, it is common to look at real estate as an excellent way to legally minimize current tax liabilities while deferring taxes. However, it it important to know that ownership of many properties is best held in your tax-advantaged retirement account. This is especially the case for situations where your purchase generates significant returns from a property that generates substantial cash flow and profits.
The math here is simple. When you buy a property individually, you normally leverage it with a mortgage and use the interest, depreciation and other expenses to lower taxable income. You effectively get a discount on the interest you pay a lender because it is deductible, and you save real dollars by having that deduction
.
On the other hand, your IRA doesn’t need this form of tax savings, as it already produces tax-deferred income. If, however, it becomes the banker, that interest normally paid to leverage a property effectively flows back to you, accumulating and compounding without taxes over the years.
Understanding the Relationship:
Looking at the situation another way, it helps to separate your current portfolio from your retirement portfolio. Let’s assume you have $300,000 in liquid funds in your retirement account, earning a blended average of 6 percent. Also, assume you talk with your accountant and they help you set up a self-directed IRA if you don’t already have one. If you put $150,000 in that account, it is effectively ready to serve as a bank and earn the interest you pay on your separate, leveraged real estate investments.
Once you have the account set up, let’s continue our hypothetical situation by having you buy an investment home with that $150,000 cash. Let’s also assume conservatively you will net $900 a month in rents on that house after all expenses, including property management fees and a 90 percent occupancy rate. It’s a simple calculation to show that you earn better than 7 percent on that cash flow, all now tax-deferred. That is before any subsequent long-term appreciation.
When you sell the house and take a profit,
that return is also protected from taxes until you start drawing out your funds
in retirement. Moreover, those profits also accrue compounded tax-deferred
earnings while they sit in your IRA.Investing in Real Estate is an Increasingly Popular Retirement Strategy
As more Americans accumulate substantial cash in their retirement accounts and interest rates remain low, billions of dollars are flowing into self-directed IRAs for real estate purchases. With the right property management firm, such as KRK Realty, this is a hassle-free way to increase your overall portfolio return while using the tax-deferred aspect of retirement accounts more wisely.
Of course, as with any such decision, be sure to check with your financial adviser to make sure of the current laws and regulations affecting any such decision. Once you do, Kevin Kirkwood will show you how to be a landlord in AZ and help you earn above-market returns.
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