The best Roth IRA investments depend on which market is performing well at the time and can be expected to continue to perform well in the future.Â The law regarding the Roth IRA limits your investment choices only slightly.Â There are many things that you can invest in that are often overlooked.
One market that has not been commonly used for retirement accounts is real estate.Â Many investors have found that real estate is one of the best Roth IRA investments, because the returns can be higher than any other investment type.
The success stories are remarkable.Â Millionaires have been made from a $20,000 opening account balance.Â The only Roth IRA limits concerning real estate transactions have to do with prohibited transaction types and instances of self dealing or indirect benefits.
Prohibited transactions include borrowing from the account or lending money to it.Â For example, if the account held the deed to an apartment complex and repairs needed to be done, you could not loan the account money to make the repairs.Â
Most people understand the rules about borrowing from the account.Â But, a lot of people don’t realize that the account can loan money to other people and collect interest.
The best Roth IRA investments often turn up in unexpected places.Â There may be people right in your own neighborhood that have a down payment, can make monthly payments, but can’t qualify for a bank mortgage because of past credit issues.
You can help those people.Â Your account can hold a lien on the property, as a bank does.Â Your account will earn regular monthly income that is non-taxable.Â This could be either a long-term investment or a short-term investment.Â
If the family you helped eventually repairs their credit and qualifies for traditional financing, then it’s a short term investment.Â You get your money back, plus interest and profits.Â You don’t pay capital gains taxes and you look for other families to help.
There are no Roth IRA limits on the amount of profit or income that an account can earn.Â You pay taxes on your original contributions and that’s all you will ever pay.Â As long as you wait till retirement to take disbursements.
There are of course Roth IRA limits on the amount of contributions you can make in any one tax year.Â Currently the limit is $5000, but that limit is going to be increased by $500 per year to try to keep up with inflation.
Most investors do not consider CDs and bonds when they thing about the best Roth IRA investments.Â Although, those are the safest, since they are insured by the federal government, returns are very low.Â Currently 3-5% is the most that you can expect to earn.
If you finance someone’s house, you should earn at least 10%, because you are providing financing for someone that can’t get it elsewhere.Â If you want to learn more about these types of interesting investment choices, there are a number of current investors that are willing to help.
You may find that the housing market offers the best Roth IRA investments and grow your wealth faster than you ever dreamed possible.Â Â Â Â
Proceed with caution! Before looking outside consider partnering with yourself. Provided this is a new purchase of a property neither you nor a prohibited party owns, you can partner with yourself.
Let’s look at an example:
Purchase of a 6-Flat in Aurora, Illinois for $500,000.00
All four â€œentitiesâ€ will take title to the property with their 40%, 30%, 17.40% and 12.60% respective undivided interests. The title vesting will be lengthy as each IRA has partnered with John and Sarah. John and Sarah could also bring in assets from the sale of another income property they owned, if feasible.
A few days later, John calls and clarifies that his current employer will not allow him to self direct any portion of his SEP-IRA. Again, John and Sarah discuss adding another partner and ultimately decide against this as they weigh the pros and cons of potential problems with partners. Instead, they opt to take out an IRA mortgage on the new property.
John and Sarah then â€œrun the numbersâ€ on their prospective purchase. Since the loan will only represent 30% of the purchase price, the property’s rent will cash flow sufficiently to meet the bank’s specific underwriting guidelines for an IRA mortgage. John and Sarah also look at the potential tax consequences of a debt/mortgage financed IRA purchase. They are comfortable with the fact that any real UBIT/tax would be minimal.
They complete the application forms necessary to proceed with the mortgage. As the next week passes John has a meeting with their real estate attorney. Their attorney raises the issue of personal liability should John and Sarah be sued as partial owners of the Aurora property and advises them to consider closing and taking title to the property in the name of a new Limited Liability Corporation (LLC) that she would form.
John calls to ask our opinion as to whether he should or should not use an LLC. Since this is a legal issue outside the realm of the IRA, we decline comment. However, we do inform John that they can use funds from their IRAs to purchase shares in a newly formed LLC, which can then be used to purchase property.
At the same time the bank also indicates that it has no problem with closing in the name of the LLC. The cost to form the LLC is a major consideration. It adds an additional $3000.00 in expenses to the transaction. They choose to proceed with the LLC in spite of the costs.
As you can see, even simple real estate purchases have twists and turns that influence the structure for your self directed IRA purchase. The decision to purchase the property with an LLC funded from combined IRA accounts enabled the investors to leverage the transaction, reduce liability and keep all management decisions within their control.
The best partner in a real estate transaction is often you!Â When structuring a transaction, please feel free to call for our perspective on compliance.
Steve Miszkowicz is the President & Managing Member of Chicago Trust Administration Services LLC
Â©2008 by Chicago Trust Administration Services LLC, all rights reserved
Hi, I’d like advice on where the best resource is for medium-complexity tax handling. My industry boomed last year, so I spent part of the year as a full-time employee and the rest as an independent consultant. I opened an SEP-IRA and put money in it, and at the same time my wife’s had a fair amount of stock transactions. We also have a 1.5-year-old son for whom we’ve put money into a 529 college plan. We’ve also donated items to charity.
What do you think the lowest price I should expect to spend for sufficient tax help would be? I’ve tried H&R Block and TurboTax softwares, but our situations typically push a little bit past what their solutions offer.
I’d love to find a way to not have to pay $$$$ for tax help this year while wrapping things up as effectively and easily as possible…