46 | RETIREMENT IRAs WORDS | Amit Katwala
INVESTMENTS
www.opp.org.uk | FEBRUARY 2011
Property for pensions?
In America, the majority of retirement savings are held in Individual Retirement Accounts (IRAs), which can be invested in a number of ways, including real estate. But, only a small fraction of savers are even aware that this is allowed. Are agents and developers in the US missing a trick by not targeting this sector of the market in a similar way to the SIPPs market in the UK? Amit Katwala investigates ...
behind many investment decisions. In the UK, savers have the option of investing their pension funds in property through Self Invested Personal Pensions, (SIPPs). Overseas property professionals have done a good job of targeting products to this market, with every effort being made to ensure that developments receive SIPP approval from the British Inland Revenue. Across the Atlantic, the picture
T
is quite different. Although 45 million Americans pay into pension schemes called Individual Retirement Accounts (IRAs), 97% of the $5trillion held in such schemes is invested in stocks, bonds and other financial instruments. So far, property has not been a popular investment class. Real estate is an acceptable
he desire to create a steady income for retirement is a major driving force
option for those with certain types of IRA, and although it hasn’t been taken up by many in the past, with the stock markets in turmoil it should become an increasingly popular choice in future. So what exactly is an IRA, and how can overseas property professionals do to take advantage?
What is an IRA? IRA stands for Individual Retirement Account, and there are a number of different types and options, not all of which permit property investment. Contributions are normally taken from an employee’s pay cheque before tax, and tax is not paid until the funds are withdrawn during retirement. The employee’s contribution is sometimes matched, or partially matched by the employer. The majority of IRA’s are controlled by specialists who offer different
investment plans, usually focussing on the Wall Street financial markets. To invest in real estate, one of three specific types of IRA is required. The simplest and most accessible way to use an IRA to invest in real estate is to get a Self-Directed IRA. This allows people to purchase
Benefi ts
Savers get a choice of what to buy, how to buy it, when to buy it, and when and how to sell it. This provides a clear opportunity for real estate professionals to take advantage when marketing properties, as they have done with SIPPs in the UK.
People can sign up for a Self-directed IRA for as little as $50, with a
schedule of other fees depending on the custodian, and funds can be rolled over from pre-existing IRAs so they are perfect for those who have built up a decent amount of capital but are frustrated by the returns of- fered by the financial markets.
It also allows savers to diversify their holdings to a greater extent. “How
can your IRA be diversified if all of your IRA funds are in Wall Street finan- cial products?” writes Thomas Phelan, the president of IRA Choices.
alternative investments like real estate, but also real estate related products such as mortgages, leases and water rights. Unlike a ‘Wall Street’ IRA, where the majority of investment decisions are made by a custodian, a Self-Directed IRA offers greater control and diversity.
Drawbacks
According to Ronan McMahon of Pathfinder International, “The IRS is flexible and accommodating” when it comes to buying international real estate with funds from an IRA. However, there are some rules and regula- tions governing what you can and can’t invest in, and the process for buying real estate is a bit more complicated than normal investment.
One of the drawbacks of using a self-directed IRA is that savers lose out
on the immediacy of other forms of investment – they can’t react quickly to changes in the markets like they can with a managed IRA because of the forms that need to be filled out. This is to make sure the investments satisfy the conditions put in place by the IRS on what can and can’t be invested in.
The key thing to remember is that the property must be for investment
purposes and is intended for after retirement. This means that savers can’t live in the property or lease it and it can’t be a holiday home. They are also forbidden from buying the property from themselves from or a relative.
Retirement security | Real estate is a safe option for savings in the current market
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