Betting on housing recovery: Real estate in your IRA
If you think that there’s money to be made by investing in recently-distressed housing markets, you’re right. But if you think that your IRA investments are limited to stocks, bonds, and mutual funds, you're wrong. Self-directed IRAs can own real estate, too – if it’s done correctly. Here’s what you need to know about safely adding real property to your retirement account.
Opening a self-directed IRA account
Self-directed IRA accounts, as the name implies, are controlled by you! You act as your own account manager. Banks and brokerage companieslimit your choices to things like CDs, stocks, mutual funds, annuities and other products on which they earn commissions. If you want more latitude with your investment choices, you need a custodian that allows self-directed IRAs.
In order to own special assets like rental houses, office buildings or land in a retirement account, you need to work with a firm that offers a self-directed IRA. Many brokerages and other institutions are happy to sell you a regular IRA but don’t care for the extra work of dealing with the self-directed variety. To take advantage of real estate opportunities, then, you might need to switch your accounts to another company.
Many types of IRAs can be converted to self-directed accounts: Traditional IRAs, SEP IRAs, Roth IRAs, 401(k)s, 403(b)s, Coverdell Education Savings (ESA), Qualified Annuities, Profit Sharing Plans, Money Purchase Plans, Government Eligible Deferred Compensation Plans and Keoghs can all be self-directed.
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Your self-directed IRA is required to have a custodian to make sure that your account complies with provisions of the Employee Retirement Income Securities Act. These provisions keep you from having too much fun with your retirement assets – for example, you can’t call your personal wine cellar a “retirement investment” and you can’t get tax bennies from things you use like a vacation cabin or yacht. You can’t use your IRA to funnel tax-free cash to your child by “investing” in his or her startup.
The custodian is there to deal with the reams of paperwork involved and keep you from getting too creative with prohibited transactions.
The real estate purchase
Why would you want to own real estate in your IRA? If you’ve been working for a number of years, chances are pretty good that most of your investment dollars are living in retirement accounts, which give you preferential tax treatment but can limit your investment choices. If that’s the case, the money available for real estate investing may largely be locked up and unavailable for real estate purchases – unless you go the self-directed rout.
Your custodian is not allowed to recommend property for your account, so any bad decisions are your own fault! You’ll probably want the guidance of a skilled real estate agent, attorney, and perhaps an accountant or financial advisor. There are companies that focus on finding real estate for retirement investing. You could also rehab and flip properties in your IRA -- an IRA LLC(definitely have an attorney set this up for you) can make repeated buying and selling easier, and even allow you to add and subtract investment partners.
A mortgage in your IRA?
You are allowed to finance your investment property, but the mortgage must be a non-recourse loan. This means the mortgage lender can’t force you to pay up if you default and the sale of the property doesn't cover the entire outstanding balance. Ask mortgage lenders for non-recourse IRA loans. Understand the mortgage interest rates will likely be higher than those for ordinary purchases because the lender assumes more risk.
Any closing costs owed by you must be paid from IRA funds – it’s illegal to co-mingle your non-IRA money with IRA account assets. Finally, be cautious if considering adjustable rate loans -- if your mortgage payment spikes and your account ends up short of funds, you’re in trouble. A fixed-rate mortgage is much safer for retirement investing.
Rules governing these accounts must be followed perfectly or you could face very stiff penalties. For example, you can use your self-directed IRA to buy your future retirement home, but you can't live in the home before you retire (minimum age 59 ½). You are not allowed to transfer properties that you or your family already own into your IRA. Vacation homes in IRAs cannot be used for your own personal benefit.
Real estate investing is far from fool-proof. If buying property will tie up the majority of your IRA, you could find yourself dangerously under-diversified. Experts advise keeping extra cash in your IRA to cover unexpected expenses, because if you use non-IRA money to repair your property, cover real estate taxes or pay your mortgage, the assets is no longer protected. This is self-dealing if you're under 59 1/2, and the money sheltered by that asset gets taxed as ordinary income and an additional 10% penalty is assessed.
The difference between self-directed IRAs and traditional IRAs is the difference between owning your own company versus buying stock in someone else’s company. You have more control and you can better make use of your own expertise (for example, you know rents and property values in your neighborhood and are positioned to spot a bargain).
However, you have to be the sort of person who relishes taking command and acquiring the opportunity to earn higher returns. According to the SEC, only about two percent of all retirement money is invested in self-directed retirement accounts. If you’re comfortable being the other 98 percent, putting real estate in your IRA is not for you.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.