Use IRA Distributions to Buy Rental Real Estate or Your Condo
© Shane Flait (2011)

Many new or about-to-be retirees have a lot of money tied up in their traditional IRA. Withdrawing that money immediately makes it taxable income. That can hurt. But, if they buy and maintain real estate for its rental income with those IRA distributions they can shelter those taxable distributions while creating retirement income or a condo to live in.

 

Owning real estate gives you great tax benefits. You can annually deduct mortgage interest payments and real estate property taxes. If you rent it out for rental income you can get additional deductions for depreciation and maintenance expenses. All these deductions often can exceed the rental income and some of your other income, sheltering them from income taxation.

 

Since new or about-to-be retirees are always interested in more retirement income and, often, in finding a retirement home, they ought to use the tax benefits of real estate investing to offset the tax liabilities that withdrawing from their abundantly funded IRA will produce. Here’s the approach they should use.

 
Find a condo that you can rent out – and, perhaps, may be interested in living in later. Then, arrange to help pay for it with annual distributions from your IRA. Remember, those are taxable distributions. Your condo will create rental income and that’ll be added to both your IRA distribution income and any working income if you’re still employed.

If you’re under 59½ years of age, you can arrange for 72(t) distributions for your IRA. These are equal yearly distributions that won’t trigger that 10% early withdrawal penalty. If you’re older you can simply withdraw any amount you want from your IRA at any time. If you’re older than 70½, you’re obliged to make minimum required distributions from your IRA.

If you’re retired and receiving Social Security benefits and possibly a pension, you may be worried about being taxed on a lot of income which possibly could produce more taxation of your Social Security. That’s where the tax shelter benefits of owning rental real estate can help out. You can offset much of your annual rental income and your IRA distribution income with the annual deductions for the condo’s depreciation, fees, mortgage interest payments and property taxes.

 

So, try to choose a mortgage amount that accomplishes this. With this done, you’re now effectively taxed only on your working income or pension income, and your rental is sheltering your IRA and rental income and paying for itself.

 

With this arrangement, your IRA is supporting your real estate rental which, in turn, can increase in value both from price inflation and future rent increases. When you do retire, if you’re not already retired, you can rely on the rental as a source of income.

 

At one point you may choose to move into your condo as your retirement haven. At that time you can shrink whatever mortgage you have by further IRA distributions since your work income will be over or your non-inflation indexed pension income will seem smaller.

 

You could also use this approach by buying a duplex or two condos. Live in unit and rent out the other. Be creative and grow wealthy. Real estate also makes for a good legacy.

 

 

 

Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com