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Create IRA Wealth with Real Estate Notes

If you own a traditional IRA, you probably think that your investment options are fairly limited. It might surprise you learn that in fact the opposite is truethere are almost no restrictions on the types of investments you can make with an IRA. However, unless you convert your traditional IRA into a self-directed IRA or a Roth IRA, you wont be able to take advantage of the many benefits of these types of retirement accounts.

What can you do with a Self-directed IRA?

Almost any type of investment is possible with a self-directed IRA. There are almost no restrictions, and in fact the only thing you cant do is use your IRA to purchase collectable items such as coins, or make investments that directly profit you or your descendants. Most of the inherent advantages of IRAs relate to the tax laws that govern these accounts.

-Profits made by IRA investments are not subject to Capital Gains Tax

-All IRA earnings are tax-deferred until you reach 59 1/2 (the age of distributions).

-IRA profits are not taxed until withdrawn from the account, even after you reach the age of distributions

Its even possible to create an IRA trust and appoint the trust as a beneficiary of your IRA. This allows you to leave tax-free money to your spouse or to children, and is particularly helpful if one of your beneficiaries is a minor. Creating a trust is also a good way of ensuring there will be enough money to pay estate taxes.

What about a Roth IRA?

In essence Roth IRAs are very similar to self-directed IRAsthey can be used to make the same types of investments and they are subject to similar restrictions. However, slightly different tax types are involved which make Roth IRAs an excellent alternative. As with self-directed IRAs, income earned by a Roth IRA is tax-deferred; in addition, all withdrawals made from the account are tax-free after the age of distributions is reached. Roth IRAs do not have a minimum distribution requirement, so the owner of such as account can withdraw as much or as little money as they like after the age of 59 1/2. The only drawback with a Roth IRA is that contributions are not tax-deductible.

Real Estate Notes Generate Passive Income

A real estate note is a contract between a property buyer and the institution or individual who lends them the money to buy it. These notes can be bought and sold by institutions on the secondary mortgage market, and can be bought and sold by private investors too. The beauty of investing in notes with a self-directed or Roth IRA is that you create passive incomethat is, income which requires no further effort on the part of the investor once the investment is made. Once you buy a note using your IRA, youll get payments coming in month after monthall going into your account without being taxed. Another advantage of buying notes rather than property is that notes do not change in value if the real estate market takes a dive. Property prices change, but the total value of a real estate note does not.

Who can buy Real Estate Notes?

Yesyou don't need to be a member of a financial institution to buy notes. With the potential to buy real estate notes at a discount of up to 30%, there is plenty of profit to be made. You can even create notes if you have the funds to do so. For people who need to borrow money for a real estate purchase but would prefer not to borrow from a bank or other financial institution, working with a private investor is the only option, and these types of loans can be particularly beneficial for the investor. Privately-funded mortgages carry much higher interest rates than those created by financial institutions, because to a private investor, the risk is greater.

Joshua Geary is the developer of Asset Exchange Strategies, LLC, which helps those nearing retirement learn how to invest in real estate notes in their IRA. Visit his blog for the latest tax deferred self directed IRAstrategies.

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