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Everyone knows the importance of planning ahead to live comfortably and securely once they quit working.

Individual Retirement Accounts (IRAs) allow you to save for retirement on a tax-deferred basis.  It is essentially a savings account with tax breaks, making it an ideal way to save money for your “golden years.”

One form of IRA is the Self-Directed IRA, through which you can invest in something that you can actually see, feel and touch – real estate.

A major benefit of using a Self-Directed IRA to purchase real estate is found in the potential tax benefits.  As with any IRA investment, you benefit from tax-deferred income until the day you take withdrawals.

Or, if your investment holdings are in a Roth IRA, your investment gains accumulate tax-free and you can withdraw it tax-free.

Active investors may buy, sell or flip properties and move funds from one project to another and still maintain the tax-deferral status of the IRA.

Self-Directed IRAs can be an attractive alternative to traditional investments such as stocks, bonds, mutual funds, and Certificates of Deposits.

Due to the complex nature of Self-Directed IRAs, the law mandates the use of a “custodian,” a neutral third party (such as the Trust Division at your bank), to manage the allowable investments.  The custodian is also responsible for record keeping and IRS reporting requirements.

But the custodian is not allowed to offer advice as to what kinds of properties to buy with assets of the IRA.  You must direct all of the investment decisions.  All transactions go through the custodian to keep you from violating the strict IRS rules regarding the investments.

Some other basic rules:

  • You and your IRA are two separate entities.  Your IRA owns the property; you don’t.
  • The property is purely an investment.  You can’t use it as a vacation home, a place for your kids to live, a second home or an office for your business or recreational purposes.
  • Since your IRA doesn’t pay taxes, you can’t take advantage of the deductions that come with owning real estate. 
  • If your property generates rental income, every bit of it must go right back into your IRA.  Since you don’t own the property, you can’t pocket any of the income.
  • Existing property that you currently own can’t be placed into your IRA.  All assets must be purchased with cash from the IRA and can’t be purchased from yourself.

As long as an investor follows the rules, real estate in a Self-Directed IRA can be a good way to make your retirement dollars work for you and secure a more comfortable future.

Investing in real estate with a Self-Directed IRA isn’t for everyone.  That’s why we can’t stress enough the importance of speaking with the Trust Division at your bank or a trusted financial adviser to decide which form of IRA is best for you, and to help you assess the level of risk that is appropriate for your financial situation.

To obtain additional information about Self-Directed IRAs, contact Gene Crawford at Citizens Bank, (870) 698-6371.


Chuck Jones is Chief Communications Officer at Citizens Bank in Batesville.

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