• IRAs or individual retirement accounts are savings accounts with tax advantages, which allow people to save up for their retirement.
• There are several types of IRAs, including Traditional, Roth, and Self-Directed IRAs.
• Self-Directed IRAs allow investment in alternative assets, including real estate, providing unique opportunities for real estate professionals.
• Most IRAs have annual contribution limits with an additional catch-up contribution for those 50 and older.
• Early withdrawals before age 59½ from most IRAs incur a 10% penalty plus applicable taxes, with certain qualified exceptions.

IRAs are personal savings accounts created to help you save for retirement while getting tax breaks. Millions of Americans use these accounts to build their retirement nest eggs. Each type of IRA offers different tax advantages.

Individual Retirement Accounts (IRAs) were first authorized by the Employee Retirement Income Security Act (ERISA) of 1974 and became available on January 1, 1975. The goal was to give workers more control over their retirement savings. Since then, IRAs have evolved into several different types.

The main benefit of an IRA is the tax advantage it provides. Unlike retirement plans offered by employers (like 401(k)s), you open and manage an IRA yourself, giving you more control over your investment choices.

IRAs have specific rules about how much money you can put in, when you can take money out, and how taxes work. The IRS oversees these accounts and updates the contribution limits each year to keep pace with inflation. Read up on a few more ideas on how to invest in real estate during inflationary periods.

There are several types of IRAs, each with different features. Understanding these differences will help you pick the right one for your situation.

Traditional IRA

A Traditional IRA lets you grow your money without paying taxes until you take it out in retirement. Key features include:

• You may be able to deduct contributions from your taxes now (income limits apply if you or your spouse has a retirement plan at work)
• Your money grows tax-free until you withdraw it
• You must start taking money out at age 73 (for those born in 1951 to 1959)
• Taking money out before age 59½ usually results in a 10% penalty to discourage using retirement funds for short-term needs
• Contributing can lower your current tax bill

Traditional IRAs work best if you think you’ll be in a lower tax bracket when you retire than you are now.

Roth IRA

Roth IRAs work differently from Traditional IRAs when it comes to taxes. With a Roth IRA:

• You pay taxes on your contributions now (no tax break today)
• Your money grows tax-free
• You can take your money out tax-free in retirement
• You don’t have to take money out during your lifetime
• You can withdraw your contributions (but not earnings) anytime without penalty
• Some income limits may prevent high earners from contributing directly

Roth IRAs are the logical choice if you think your tax rate will be higher in retirement or if you want tax-free withdrawals later.

SEP IRA

SEP IRAs are designed for self-employed people and small business owners. These accounts:

• Allow much higher contributions than regular IRAs
• Are funded by employers, not employees
• Give businesses a tax deduction for contributions
• Follow the same withdrawal rules as Traditional IRAs
• Are simple to set up and maintain

SEP IRAs help entrepreneurs and small business owners save for retirement without the hassle of setting up more complex plans like 401(k)s.

SIMPLE IRA

SIMPLE IRAs are for small businesses with 100 or fewer employees (specifically, those who earn at least $5,000 in the previous year and expect to earn at least $5,000 in the current year). These plans:

• Require employers to contribute (either by matching employee contributions up to 3% of compensation or by making a non-elective contribution of at least 2% of compensation for all eligible employees)
• Allow employees to contribute too
• Have higher limits than Traditional IRAs but lower than SEP IRAs
• Charge a 25% penalty for withdrawals in the first two years
• Otherwise follow similar rules to Traditional IRAs

Self-Directed IRA

Self-Directed IRAs give you more investment options. These accounts:

• Let you invest in things beyond stocks and bonds
• Can include real estate, precious metals, and private investments
• Need a special custodian to manage the account
• Follow the same tax rules as Traditional or Roth IRAs
• Have more complex rules about what you can and cannot do (such as life insurance contracts, most collectibles, or self-dealing transactions)

The IRS sets annual contribution limits for IRAs.

• Traditional and Roth IRAs: The maximum contribution is typically the same for both types, with an additional catch-up contribution allowed for those 50 or older.
• SEP IRAs: Higher limits, allowing contributions of up to 25% of compensation or a specific dollar amount, whichever is less.
• SIMPLE IRAs: Distinct limits for employee contributions, with additional catch-up contributions available for those 50 or older.

Your income affects whether you can deduct Traditional IRA contributions or contribute to a Roth IRA at all. These income limits change each year based on your tax filing status and Modified Adjusted Gross Income (MAGI).

For Traditional IRAs, if you or your spouse has a retirement plan at work, your tax deduction might be reduced or eliminated if your income is too high.

For Roth IRAs, you can’t contribute directly if your income exceeds certain limits. In 2024, single filers start to lose eligibility at $146,000 and can’t contribute at all above $161,000. For married couples filing jointly, the range is $230,000 to $240,000.

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Understanding when and how you can take money out of your IRA is important to avoid unnecessary penalties.

Early Withdrawal Penalties

If you take money out of most IRAs before age 59½, you’ll usually pay a 10% penalty plus regular income taxes. However, you can avoid the penalty in certain situations:

• Buying your first home (up to $10,000)
• Paying for college
• Covering large medical expenses (more than 7.5% of your income)
• Paying for health insurance while unemployed
• If you become disabled or die
• Taking regular payments under a specific IRS rule called 72(t)

Required Minimum Distributions (RMDs)

With Traditional, SEP, and SIMPLE IRAs, you must start taking money out when you reach:

• Age 73 if you were born between 1951 and 1959
• Age 75 if you were born in 1960 or later (starting 2033)

These required withdrawals are calculated based on your life expectancy and account balance at the end of the previous year. If you don’t take these required withdrawals, you’ll face a hefty tax penalty of 25% of the amount you should have withdrawn.

Roth IRAs don’t require these distributions during your lifetime, which makes them useful for passing wealth to your heirs.

If you work in real estate, IRAs offer both investment opportunities and ways to grow your business. Understanding how IRAs and real estate work together can give you an edge in the market.

Investing in Real Estate Through Self-Directed IRAs

Self-directed IRAs allow people to invest in real estate using their retirement funds. As a real estate professional, you can help clients who want to diversify their retirement accounts beyond stocks and bonds.

When someone buys property through a self-directed IRA, the IRA—not the person—owns the property. This means all expenses like property taxes, repairs, and maintenance must be paid from the IRA itself. Similarly, all income from the property (like rent) must go back into the IRA.

The rules are strict: IRA owners can’t use the property themselves, fix it up with their own labor, or let family members use it. They need to keep everything at “arm’s length,” which means treating the property purely as an investment.

These rules create a perfect opportunity for real estate professionals who understand how IRAs work. Your expertise becomes valuable to retirement investors looking for alternative investments.

Business Development Opportunities for Real Estate Professionals

The self-directed IRA market offers ways to grow your real estate business. By becoming knowledgeable about using retirement funds for property investments, you can attract clients that other real estate professionals might miss.

Consider building relationships with companies that manage self-directed IRAs (called custodians). These companies often need real estate experts to refer to their clients. By partnering with them, you can get referrals from investors specifically looking to buy property with their retirement funds.

You can also create educational materials like workshops or blog posts explaining how to invest in real estate with an IRA. This positions you as an expert and attracts potential clients who might not have considered using their retirement money for real estate.

Property Management and IRA-Owned Real Estate

Property management is especially important for IRA-owned real estate. Since IRA owners can’t manage their properties themselves, they need professional management. This creates steady business opportunities for property managers who understand the special requirements of IRA-owned properties.

When managing these properties, you need to keep detailed records showing that everything follows IRS rules. All dealings must be strictly business, with no special treatment for the IRA owner or their family. Rent payments must go directly to the IRA, not to the owner personally. Management fees must be paid from the IRA, not from the owner’s personal funds.

Financing Considerations for IRA Real Estate Investments

Helping clients understand how to finance property in an IRA is another valuable service. IRAs can use loans to buy property, but these loans must meet special requirements.

Any loan used for an IRA property must be a non-recourse loan, which means the lender can only take the property if the loan isn’t paid—they can’t go after the IRA owner’s other assets. Finding lenders who offer these special loans requires insider knowledge that you can provide.

When an IRA uses a loan to buy property, part of the income might be taxable under special rules about “Unrelated Business Taxable Income” (UBTI). Understanding these tax issues helps you guide clients through the process and connect them with tax experts who can help.

The tax benefits of IRAs are what make them so valuable for retirement planning. Understanding how taxes work with these accounts helps explain why they’re so popular.

Traditional IRA Tax Treatment

With a Traditional IRA, you get tax benefits now but pay taxes later. Contributions may be tax-deductible, depending on your income and access to a workplace retirement plan. This deduction can lower your current year’s tax bill, effectively giving you a “discount” on your retirement savings.

Once the money is in the account, it grows tax-deferred. Unlike regular investment accounts where dividends, interest, and gains are taxed annually, the earnings in a Traditional IRA remain untaxed until withdrawal.

When you retire and begin taking withdrawals, they are taxed as ordinary income. The government requires you to start withdrawing funds—known as Required Minimum Distributions (RMDs)—at age 73 if you were born between 1951 and 1959 or at age 75 if born in 1960 or later. This ensures deferred taxes are eventually collected.

Roth IRA Tax Treatment

Roth IRAs flip the tax benefits—you pay taxes now to get tax-free benefits later. When you contribute to a Roth IRA, you use money you’ve already paid taxes on. This means no tax break today.

Like a Traditional IRA, your investments grow tax-free inside the account. But the big advantage comes later: when you take money out in retirement, you pay no taxes at all—not on your original contributions and not on any investment earnings.

This tax-free growth can be huge if your investments do well over many years. It’s especially valuable if tax rates go up by the time you retire.

Roth IRAs are more flexible than Traditional IRAs. You can take out your contributions (but not earnings) anytime without taxes or penalties. This gives you access to your money in an emergency.

Another major benefit: Roth IRAs don’t require you to take money out during your lifetime. This lets your tax-free growth continue as long as you live, potentially leaving more for your heirs.

Estate Tax Considerations

IRAs play an important role in planning what happens to your money after you die. When you pass away, Traditional IRA money is still subject to income taxes when your heirs withdraw it. They’ll generally need to empty the account within 10 years.

Spouses who inherit IRAs have more options, including treating the IRA as their own or remaining a beneficiary with special withdrawal rules.

Roth IRAs offer better inheritance benefits—your heirs won’t pay income taxes on the money they withdraw (as long as the account is at least five years old). They still have to empty the account within 10 years, but without the tax burden of a Traditional IRA.

With some smart planning, you can get even more value from your IRA accounts. Here are some powerful strategies:

Backdoor Roth IRA

If you earn too much to contribute directly to a Roth IRA, you can use the “Backdoor Roth” strategy.

First, you contribute to a Traditional IRA, which has no income limits. Then, you convert that Traditional IRA to a Roth IRA. You’ll pay income tax on any pre-tax amounts being converted, but afterward, the money grows tax-free and comes out tax-free in retirement.

This works best if you don’t have other Traditional IRA money. If you do, the IRS uses a formula called the “pro-rata rule” that might make you pay more taxes on the conversion.

Some people with existing Traditional IRAs move that money into their employer’s 401(k) plan first (if allowed) to avoid the pro-rata rule complications.

While this strategy is legal and commonly used, it’s smart to work with a tax professional to make sure you do it correctly.

IRA Rollovers

Moving retirement money between accounts can help you get better investment options and tax advantages.

When you leave a job, rolling your 401(k) into an IRA usually gives you more investment choices and possibly lower fees than leaving it with your old employer.

If you have several IRAs, combining them makes it easier to track your investments and required withdrawals. The best way to do this is through a direct transfer from one financial institution to another.

Converting Traditional IRA money to a Roth IRA (paying taxes now for tax-free growth later) makes sense in years when your income is lower than normal, if you think tax rates will go up, or to have both taxable and tax-free money in retirement.

When moving retirement money, it’s best to use direct transfers between financial institutions rather than having the money sent to you first. If you receive the money personally, 20% is withheld for taxes, and you have just 60 days to complete the rollover to avoid penalties.

Spousal IRA Contributions

If your spouse doesn’t work or earns very little, you can still help them save for retirement. Spousal IRAs allow the working spouse to contribute to an IRA for the non-working spouse. This helps both partners build retirement savings, even when only one is earning income.

To qualify, you must file taxes jointly, and the working spouse must earn at least as much as the total contributed to both IRAs. The non-working spouse can choose either a Traditional or Roth IRA.

This strategy ensures both spouses build their own retirement security, which can significantly increase your family’s retirement resources over time.

Can I lose money in an IRA?

Yes, you can lose money in an IRA.

An IRA is just an account—the investments you choose inside it determine whether you make or lose money. If you invest in stocks, bonds, or real estate that drop in value, your IRA balance will go down. Market downturns or poor investment choices can lead to losses.

However, diversifying your investments (not putting all your eggs in one basket) and investing for the long term can help manage this risk. Even if investments lose value temporarily, the tax benefits of IRAs remain, which can help offset some losses through tax savings over time.

How do I choose between a Traditional and Roth IRA?

Choose based on when you want the tax benefit. A Traditional IRA gives you a tax break now—your contributions might be tax-deductible, reducing your current tax bill. You’ll pay taxes when you withdraw money in retirement. This works best if you expect your tax rate to be lower in retirement.

On the other hand, a Roth IRA gives tax benefits later—you contribute after-tax dollars now, but withdrawals in retirement are completely tax-free. Choose a Roth if you expect your tax rate to be higher in retirement or want tax-free withdrawals. Roth IRAs also offer more flexibility since you can withdraw contributions anytime, and you’re never forced to take distributions.

Can I use my IRA to buy investment property for personal use in the future?

No, you cannot use your IRA to buy property that you plan to use personally. IRS rules strictly forbid “self-dealing”—using IRA assets for your personal benefit.

If you buy property with your IRA, it must remain purely an investment. You cannot live in it, vacation in it, or even do maintenance work on it yourself. If you take the property out of your IRA as a distribution, it’s taxed at fair market value, often resulting in a large tax bill.

You can invest in property through your IRA as a pure investment (collecting rent, etc.), but you must keep a clear separation between your personal finances and your retirement account.

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