Ideally, saving for your retirement shouldn’t be overly complicated — but, alas, building a reliable retirement plan can involve juggling a variety of accounts and navigating a multitude of investment decisions. Fortunately, today’s financial world offers several sophisticated and streamlined resources for investment and savings.
One of the most common ways investors save for retirement is by investing through Individual Retirement Accounts (more commonly referred to as IRAs). These are powerful investment vehicles — typically tax-advantaged — that can assist investors in accruing long-term wealth, toward the goal of supporting retirement.
The good news is that it’s simple to invest in Fundrise’s private market real estate using an IRA. That can be a big deal: at Fundrise, we feel that retirement investing and real estate investing are a natural fit.
Below, we explain some of the basics of IRA investing and why using an IRA to access real estate investments can be an especially potent strategy.
What is an IRA?
Individual Retirement Accounts (IRAs) allow you to save for retirement in a tax-advantaged way. Depending on the type of IRA, it can either be considered tax-deferred or tax-exempt.
The two most common types of IRAs are Traditional and Roth. Typically, earnings within an IRA grow tax-free, with taxation rules only applying upon initial contribution or final distribution.
Why is real estate well suited for IRA investing?
Because they’re designed to support retirement, a goal that is usually years or even decades away for investors, IRAs are long-term and illiquid accounts by nature.
Many financial planners see IRAs and real estate investing as an ideal combination: real estate investments are traditionally long-term and relatively illiquid — homes and investment properties aren’t as easily bought and sold like stocks on an exchange, which leads to the potential for outsized returns through private market opportunities. This aligns well with the way IRAs have been developed to maximize their long-term benefits.
Much like the purchase of a new home, many kinds of real estate investments take time to appreciate and begin generating returns. As IRA investors typically have less need for liquidity over the course of a real estate investment, they are in a unique position to wait for real estate investments to fully ramp-up, stabilize, begin operating, and ultimately generate their full return.
Not only do real estate investments align with IRAs from a time horizon and liquidity standpoint, adding private real estate to your IRA can also equip the account with deeper portfolio diversification, helping you hedge your exposure against volatility unavoidable in public markets, like the stock market. Publicly-traded investments tend to be susceptible to volatile price swings in response to market sentiment or exogenous macroeconomic shocks.
While real estate, in general, is not immune to an economic downturn, private real estate investments can be largely protected against the volatility of the stock market since they do not trade on a public exchange. Private real estate investments — such as most of Fundrise’s offerings — are not reliant on volatile shifts that can commonly be seen within the public market. That said, private real estate investing offers an opportunity for investors to diversify retirement savings away from the public market.
How do I know if I’m eligible to invest in an IRA?
Nearly everyone can contribute to an IRA so long as they have earned income. There are some eligibility restrictions, though, depending on your age and income level.
For example, if you do not have earned income in a given year, you will likely be unable to make an individual contribution to your IRA in that year. Conversely, if you earn income above a certain threshold, you may not be eligible to directly contribute to a Roth IRA or deduct your Traditional IRA contributions at the end of the year. Additionally, if you are over age 70-and-a-half you’re no longer eligible to invest through a Traditional IRA.
How much can I contribute to an IRA?
The total amount of IRA contributions you can make across all of your IRAs is the lesser of $6,000 per year (or $7,000 per year if you are over the age of 50) or your yearly earned income.
If you are over the age of 50, your maximum IRA contribution is larger — that is called a “catch-up contribution” which is a way of the IRS demonstrating its understanding that you may not have been able to save as much as you wanted in your younger years.
An IRA contribution is “new money” directed into the account. You may have the ability to contribute to IRAs at multiple institutions. That said, it is important to note that IRS annual contribution limits apply across all of your IRAs regardless of the institution or custodian.
Types of IRAs
A Traditional IRA is a pre-tax retirement account where earnings traditionally are calculated on a tax-deferred basis, according to the IRS.
In this type of retirement account, taxes can potentially be deducted upfront, based on IRS deduction limits. As you are invested through a pre-tax Traditional IRA, earnings are calculated on a tax-deferred basis, meaning you’d start paying taxes when you start taking money out at retirement. You should not expect yearly tax forms from a Traditional IRA unless you take an early distribution. Due to the upfront tax advantages of a Traditional IRA, early distributions are subject to potential taxation as well as early distribution penalties.
When a distribution is taken from a Traditional IRA, you should expect to pay taxes on the distributed amount in the same year of the distribution, based on your tax situation at the time.
If you are invested through a Traditional IRA, starting in the tax year you turn age 70-and-a-half, you will need to start taking Required Minimum Distributions (RMDs) per IRS regulations. The IRS begins requiring this type of IRA distribution to ensure you will begin taking out your retirement funds, so they can begin to collect the taxes on your pre-tax account distributions each year.
Given the illiquid nature of Fundrise’s investments, we do not anticipate being able to specifically accommodate RMDs on our platform.
A Roth IRA is a post-tax retirement account where earnings traditionally are calculated on a tax-exempt basis.
In this type of retirement account, taxes are paid at the end of the tax year that the contribution was made. As you are invested through a Roth IRA, earnings are calculated on a tax-exempt basis and therefore a Roth IRA investor should not expect yearly tax forms to be generated. When a distribution is taken from a Roth IRA, you should not expect to pay taxes on the distributed amount, assuming you have met the requirements for a Roth IRA distribution.
Roth IRA funds are eligible to remain within an IRA throughout your life and, with Roth IRAs, there are no requirements to withdraw funds at a certain age.
Which type of IRA is right for you?
Determining whether you should open a Traditional or Roth IRA depends largely on your situation. Always remember that before making any investment you should discuss your personal financial situation with your own financial advisor, and the information we offer here should not be construed as investment advice. In general, some factors that investors may consider when deciding between a Traditional and Roth IRA include the following: existing retirement accounts, eligibility to contribute, and eligibility to deduct contributions. Each of these can play an important role in how an IRA of each kind will function.
That said, it is important to highlight a few additional factors you may also consider when deciding on your preferred kind of IRA:
Your age and time horizon traditionally play a large role in determining potential investment choices and may also be a factor to consider when determining which IRA account type to open. (Your time-horizon refers to how long you plan to hold the investment and when you may expect to need to use the funds.) As such, it’s important to remember the different ways each IRA type may be taxed depending on your age and how that could impact you down the road.
For both IRA types, after the age of 59-and-a-half, you should be able to take distributions without being penalized (assuming the distribution abides by IRS rules).
That said, how you pay taxes on a potential distribution can often differ between accounts. If you were to take a distribution from a Roth IRA after age 59-and-a-half, there should be no taxation applied as long as the IRA had received contributions for at least five years prior, thanks to the fact that the first contribution was made on an after-tax basis. On the other hand, taking a distribution from a Traditional IRA after the age of 59-and-a-half would likely generate a taxable event, and the full amount of a potential distribution would likely be the basis for your taxation at that time.
In addition to the taxation differences for a normal distribution (distribution after age 59-and-a-half), there are also different taxation rules for early IRA distributions (distribution before age 59-and-a-half) depending on your situation and IRA type.
For example, a younger IRA investor — or any investor with a long time horizon — may select a Roth IRA, pay their taxes up front, and take advantage of tax-exempt growth over many subsequent years. In cases like this, a long time horizon can potentially maximize earnings, since the investor is effectively choosing to pay taxes on their current income, pre-growth, and not the final distribution, which can frequently be larger. Another way to consider this situation is by asking whether an investor will likely be in a lower tax bracket at the time of investment than they will be at the time of the distribution, during retirement. If their bracket is likely to be lower now, many investors will find a Roth IRA to be more attractive, since the account’s structure lets them get tax payments out of the way during a period when they are likely to owe less.
Conversely, an older IRA investor with a shorter time horizon may determine that a pre-tax IRA may be the more advantageous decision, as it allows for a greater principal to generate growth during the available investment period, or, similarly, they might believe that their current income is greater than the amount they plan to take in eventual retirement distributions. Additionally, if an investor can deduct their pre-tax contributions from earned income in a given year, that opportunity could serve as an added benefit of investing through a Traditional IRA.
How to get started
We’ve made it simpler than ever to invest in Fundrise’s private market real estate using an IRA. Existing investors can get started by logging in and going to fundrise.com/ira. We can accept investments from Traditional and Roth IRAs opened through our platform. The entire IRA contribution and/or transfer process can be done through our website.
If you are looking to invest with Fundrise for the first time, you’ll need to begin our onboarding process for taxable accounts and exit before placing an investment. This will create an account for you, which you can use to log in and then go to fundrise.com/ira to begin opening or transferring your IRA.
While your IRA may be opened and funded through our platform, the custodian of your Fundrise IRA will be Millenium Trust Company.
For more information on RMDs IRA eligibility and distribution rules, you can visit the IRS site. For any tax information specific to you, please consult your CPA or tax professional as we are unable to provide personalized tax advice.