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ROTH IRA - IRA REAL ESTATE INVESTMENTS - PAY NO TAX ON GAIN

Diversify and Protect your Retirement Portfolio - Transfer Tax Free into Real Estate Cash Flow

Tax law allows real estate investments to be included in traditional and Roth Individual Retirement Accounts (IRAs). However, various criteria must be satisfied for real estate investments to be valid IRA investments. Costly penalties apply if these criteria are not met.

IRA investor interest in real estate has increased recently as dramatic stock market declines have prompted investors to look for ways to diversify IRA investment risk. Any type of investment real estate can qualify for IRA investment including apartment buildings, office buildings and motels.

Establishing a Self-Directed IRA

IRA real estate investments must be acquired by establishing a self-directed traditional or Roth IRA through one of three types of IRA trustees - an IRA custodian, an independent IRA administrator or an IRA advisor. According to The Wall Street Journal, initial account setup fees can range from $50 to more than $1,500. Annual fees range from $200 to more than $500 depending on the type of IRA trustee. The more "hand-holding" (advice, management, help with paperwork) offered by the IRA trustee, the higher the fees.

IRA custodians offer no hand-holding and charge the smallest fees. IRA advisors provide a full range of services and charge the highest fees. To find IRA trustees, contact 1031 FEC.

Only cash can be placed into an IRA. IRA cash can then be used to purchase real estate, stocks, bonds, mutual funds or other investment assets. IRA cash can be rolled into a self-directed IRA from the taxpayer's existing IRAs or from certain corporate pension funds on retirement.

When IRA real estate is sold, the proceeds can be reinvested in real estate or invested in other assets. Taxes are avoided as long as funds are kept in the IRA. If the IRA is a traditional deductible IRA, taxes are postponed but eventually paid. Taxes are permanently avoided for Roth IRAs as long as withdrawals comply with IRS rules. Typically, only taxpayers older than 59 can make qualified IRA withdrawals.

Because ordinary (not capital gains) tax rates apply to qualified withdrawals from traditional deductible IRAs, Roth IRAs are the best type of IRA for real estate investment.

One of the primary benefits of using a Roth IRA is that you don't pay income tax when you withdraw funds in retirement.

Unfortunately not everyone meets IRS standards to contribute to a Roth IRA. The primary reason individuals are not allowed to contribute is because their incomes exceed the Roth IRA income limits.

Many individuals that did not qualify for income reasons end up investing in 401k plans and Traditional IRAs. With a Traditional IRA you receive a tax break today, but pay income taxes in retirement. This is opposite of what happens with a Roth IRA. (Compare Roth IRAs and Traditional IRAs.)

The IRS has always allowed certain individuals to convert their Traditional IRAs to Roth IRAs as long as they met specific qualifications and paid income tax on the conversion. But high income earners were unable to convert until recently.

No Income Cap to Convert Traditional IRA to Roth IRA

In the past to be able to convert from a Traditional to a Roth IRA your income needed to be under $100,000. The IRS rules have changed and there is no longer an income cap in place.

With the cap removed high income earners can now convert as long as they pay the appropriate tax on the conversion. There is no 10% early withdrawal penalty if the funds move from the Traditional IRA to the Roth IRA in a 60 day window.

Roth IRA Conversion Taxes

When you convert from a Traditional IRA to a Roth IRA you pay income tax on the contributions. The taxable amount that is converted is added to your income taxes and your regular income rate is applied to your total income.

Retirement-Plans/IRA-One-Rollover-Per-Year-Rule:   http://www.irs.gov/

Rules for Home Purchase:    http://recenter.tamu.edu/pdf/2058.pdf

Why Convert to Roth IRA?

Tax savvy investors want to pay as little income tax as possible. Converting to a Roth IRA allows you to make smart tax moves that will save money in the long run.

If you anticipate your income dropping significantly in a certain year (and increasing in following years) then a conversion could be done in the low income year. Since your income is lower you may be in a lower tax bracket when you convert.

Likewise if the government announced increase tax rate increases to go in effect the following year then a conversion in the current year would save income tax.

Converting to a Roth IRA will guarantee you will owe no additional income tax on the converted funds during retirement. The balance in your portfolio will be what you can tap in retirement and you won't have to calculate an after-tax balance.

 

Other Retirement Accounts You Can Convert Into a Roth IRA

 

Beyond a traditional IRA, there other tax-deferred retirement plans that can also be converted to a Roth IRA. They include:

•SIMPLE IRA (after two years)

•SEP IRA

•457(b) Plan

•403(b) Plan

•Designated Roth Account (401(k), 403(b), or 457(b) )

 

Except for the Designated Roth Account, all income must be included as taxable in the year of conversion.

Potential Pitfalls

Interested investors should do their homework before setting up a self-directed IRA to invest in real estate. If IRS criteria for self-directed IRAs and qualified withdrawals are not followed, combined penalties and income taxes can range from 15 percent to more than 100 percent of the real estate's value.

Properties included in IRAs cannot be the investor's personal residence or purchased from immediate family. There must be enough cash in the IRA to pay annual property expenses (mortgage, repairs, maintenance) if the property does not generate sufficient cash flow. Additional funds can be rolled into the self-directed real estate IRA from other IRAs or certain corporate pension funds if necessary and tax criteria are met.

Real estate IRAs have numerous potential benefits and drawbacks. Because of the complexities of the rules governing these transactions, consultation with 1031 FEC and your tax advisor is recommended.  One may find that that Real Estate IRA investments smaller than $100,000 may be a challenge for some investors to justify.                                       Major Article Contribution by By Dr. Jerrold J. Stern

  

This Scenario is only one of many alternatives. Contact 1031 FEC for your Individual Plan

*Financial Exchange and 1031 FEC Consultants recommend that transfer of property be approved by a client's experienced business legal and/or tax advisors.  This web site's "Investment" web page contains a partial survey of current available real estate provider properties.  The properties may be subscribed before noted.  Information is obtained from sources deemed reliable but not guaranteed. Investors should conduct their own independent due diligence and rely only on those results. Generic photos on this web site may not represent specific past, future or current 1031 FEC client properties.  **1031 Qualified Intermediary fees paid by the Party wishing to Defer Tax (Exchanger).  Please inquire to 1031 FEC for current USA property availability, required client qualification and fees at toll free telephone number 800.333.0801.  Thank you.

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