Fundrise has teamed up with Millennium Trust Company to offer investors the ability to invest directly in real estate through IRA accounts.

Key Takeaways

  • Self-directed IRA custodians have recently emerged, creating a more tax-efficient means to purchase alternative investments.
  • Investing in real estate through an IRA may help maximize potential returns without increasing risk.
  • IRA accounts are well-suited for long-term real estate investing.

Self-Directed IRAs: Diversify Your Retirement Savings

Over the past decade, real estate has proven to be a profitable alternative investment offering attractive risk-adjusted returns. According to data on Yahoo Finance, during the period from 2008 to 2016, real estate investments earned an average annual dividend yield of 12.01%. In comparison, stocks and bonds earned 2.01% and 3.17% respectively.

Unfortunately, many investors with wealth concentrated in retirement accounts have been unable to participate. This is because real estate investments have traditionally only been available through taxable accounts. The big financial institutions that act as custodians for Individual Retirement Accounts (“IRAs”) have typically only allowed conventional investments like publicly traded stocks, bonds, and mutual funds. This has made it exceedingly difficult for the average investor to purchase real estate in a tax-advantaged account. The result has been a reduction of up to 40% in take-home returns due to federal taxes alone.

There’s good news: In recent years, self-directed IRA custodians have emerged – driven by demand for a more tax-efficient means to purchase alternative investments. These companies enable investors to diversify retirement funds and allocate savings more efficiently in a centralized account.

Getting the Most Out of Your Investment

According to the Tax Foundation, U.S. workers paid an average income tax of 14.16% in 2014. Since investment income is commonly taxed as ordinary income, taxes can greatly reduce the take-home return on an investment. For example, at a 14.16% tax rate an investor who invested $10,000 and earned 10% in a given year would only take home $858 of their $1,000 dollars earned. This example assumes that all earnings were taxed as ordinary income.

Based on U.S. Census Bureau data, the national average retirement age in the United States is 63 years old. This means that approximately 40 years of work are needed to save for retirement on average. Some investors may try to retire early by dialing up the risk of their investments, and therefore the expected potential returns. Instead, IRA accounts provide an opportunity for investors to pocket more money without any increase in risk. This course may boost take-home returns earned and help reduce the number of working years needed to retire comfortably.

What’s the downside? To compensate for tax advantages, the U.S. government imposes restrictions on withdrawing money from an IRA account prior to retirement age or certain qualified events. To maximize the benefits of an IRA account, funds must be kept in the account until retirement.

Why Choose Real Estate Investments Through Your IRA?

Although the tax benefits of IRAs are well-known, the lack of access to alternative investments limits their benefits. One common frustration with IRA funds is illiquidity. However, when paired with an alternative, such as real estate investments, this is in fact their greatest benefit.

Illiquidity is often viewed as a dirty word in the world of taxable accounts. This reputation is undeserved, though, because there are many benefits to illiquid investments. Some benefits include reduced volatility and a lower beta, or correlation to the broader stock market. As such, investors who purchase illiquid investments, such as real estate investments, through IRA accounts may have an easier time stomaching the inability to frequently trade in and out given the long time horizon.

Conclusion

Although dialing up your risk may seem like a sexier way to juice take-home returns, IRAs provide a no-frills, well-suited vehicle for the long-term appreciation of the assets you’re already comfortable owning.

To continue providing innovative ways for investors to potentially earn better returns, Fundrise has teamed up with Millennium Trust Company. Investors now have the ability to invest on the Fundrise platform through Millennium IRA accounts. This unique relationship allows Fundrise investors to easily invest through tax-advantaged retirement accounts with relatively modest fees. You can learn how to set up your Millennium Trust Account and invest with Fundrise here.

Learn More:

The Benefits of Illiquidity

Diversification: Why It’s Crucial For Your Portfolio

Afraid of Commitment? Don’t Be Such A Millennial