If you’re thinking of buying real estate with Roth IRA funds, let me give you a little advice. Choose the right custodian. There are many examples of a rolled over IRA successfully buying real estate, but the fees charged by various custodians can make a big difference.
#1 – Uninvested Cash Balances
Once you start buying real estate with Roth IRA funds, you’ll almost always have some cash in the account. In fact, you must have some cash there, because all the costs associated with maintaining the property must come from the account.
Don’t think the trustees don’t know this. They take advantage. There is a great company that takes away 45% of your interest earned on uninvested cash balances every year. They call it a maintenance fee, but there is no additional maintenance involved. No matter what is held within the account, the same type of maintenance is required.
#2 – Additional Charges
When it comes to an IRA built up to buy real estate, you’ll need to have a self-directed account. You tell your custodian to write a check for a purchase. Some companies charge for writing checks. They charge for transferring titles and deeds or mortgage notes. They charge a fee each time you use the account to make a purchase or sell a property. All of these fees can add up to thousands of dollars in a year.
When it comes to a built-up IRA to purchase real estate, one of the biggest advantages for investors is the ability to keep more of their earnings, due to the account’s tax-free environment. But, if a custodian charges numerous fees, they don’t keep as much.
Similarly, one of the biggest advantages of buying real estate with Roth IRA funds is that you’ll “never” pay taxes on those earnings. Your contributions are taxed as regular income. There are no capital games or income taxes on winnings made within the account. Qualified distributions are never taxable.
#3 – Annual maintenance fee and reasonable installation charge
If you have a transferable IRA, real estate purchase can only be accomplished if you choose a custodian that offers the option. Those companies that currently offer “free and easy setup” do not offer the option. They are stockbrokers and charge large fees for buying and selling stocks.
A reasonable setup fee is $50. The annual maintenance fee depends on the total value of the account. If you’re like me, you’re looking at a million dollars or more buying real estate with Roth IRA funds. Trust me, it’s not an impossible dream.
#4 – Get an education
If you’re new to buying real estate in a transferable IRA, get some education and information first. There are a small number of companies that offer “hands-off” investment options. That might be the best option right now.
As you learn more about buying real estate with Roth IRA funds, you’ll be able to do more. But, start slowly, just to be safe.
