For many investors, retirement savings are tied up in traditional accounts like IRAs or 401(k)s. These accounts are usually limited to familiar assets such as stocks, bonds, or mutual funds. But what if you could use those funds to purchase something more tangible, like real estate? In Wilmington, North Carolina, one of the most promising strategies is using a Self-Directed IRA (SDIRA) to buy investment property. With a Self-Directed IRA, you gain the flexibility to invest beyond traditional markets while keeping the tax advantages of a retirement account.
This approach combines the long-term benefits of retirement savings with the potential income of real estate. While it can be an excellent opportunity, it also comes with strict rules that must be followed. Understanding these guidelines before moving forward is essential to avoid penalties and to maximize your investment.
What is a Self-Directed IRA?
A Self-Directed IRA is a retirement account that allows you to invest in assets outside the typical menu of stocks and bonds. With the right custodian, your IRA can hold real estate, giving you more control over how your retirement money grows.
Not every custodian offers this option. Many traditional financial institutions limit IRAs to conventional investments. To invest in Wilmington real estate, you must open a Self-Directed IRA with a custodian that specializes in real estate investments. Choosing a custodian with a fair fee structure is important, since some advisors may steer you away from real estate simply because it doesn’t generate commissions for them.
The Rules You Must Follow
The IRS places strict limits on what you can and cannot do with IRA-owned property. The most important rule is that you cannot personally benefit from the investment until you retire.
This means:
- You cannot live in the property.
- You cannot rent it to yourself, your spouse, children, or parents.
- You cannot use the property as a vacation home.
You also cannot buy or sell property to and from yourself or other disqualified persons. Essentially, the property must be held strictly for investment purposes. However, you may rent the property to distant relatives, business partners, or unrelated tenants, as long as the arrangement follows IRS guidelines.
Some investors choose to purchase a property in their IRA and rent it out during their working years, then move in after retirement once the rules allow personal use. This can be a long-term strategy that combines current rental income with future lifestyle planning.
Property Types You Can Own
An SDIRA gives you flexibility in the types of property you can purchase in Wilmington. You are not limited to residential homes. Your account may hold:
- Single-family rentals
- Multi-unit residential buildings
- Commercial properties
- Raw land
- Low-maintenance options such as parking lots or storage facilities
This range of choices allows investors to match their retirement goals with the type of real estate they believe will provide steady returns.
Funding the Purchase
One important limitation is that you cannot use a traditional mortgage when buying property through an IRA. Your IRA must have enough cash to purchase the property outright and to cover all related expenses such as closing costs, taxes, and insurance.
This requirement can make the entry point higher than traditional investing, but it also reduces the risk of debt. All property expenses—repairs, improvements, insurance, and maintenance—must also be paid directly from the IRA. On the flip side, any rental income or sales profits must flow back into the IRA account, where they continue to grow tax-advantaged until you make withdrawals in retirement.
Flipping and Other Investment Strategies
An SDIRA can also be used for property flipping, though this comes with more restrictions. Flipping is allowed if it is part of your business, but there may be limits to how many homes you can flip in a given year. The safer strategy for many investors is to buy and hold property, earning steady rental income that builds retirement savings over time.
Whatever strategy you choose, diversification is important. Placing your entire retirement portfolio into a single property can increase risk. It’s wise to balance real estate with other types of investments within your IRA.
Potential Risks and Penalties
While the opportunity to use your IRA for Wilmington real estate is exciting, the risks are real. If you break the rules—such as renting to a disqualified person or using the property yourself—the IRS can disqualify the entire account. That would mean paying taxes on the full balance and possibly facing a 10% penalty if you are under age 59½.
Because the rules are strict, it’s important to work with a custodian experienced in real estate transactions and to seek professional financial advice before making decisions.
Is a Self-Directed IRA Right for You?
Investing in Wilmington real estate with a Self-Directed IRA can be a smart way to grow retirement savings. It provides control, flexibility, and the chance to build wealth in a market you understand. But this strategy is not without challenges. It requires discipline, a strong understanding of the rules, and careful planning.
If you are considering this path, begin by opening the right type of IRA, confirm that you have enough funds to cover a full purchase, and make sure you understand the IRS guidelines on self-dealing and property use. With the right preparation and guidance, you can use your IRA to turn real estate into a reliable long-term asset for your retirement.
Contact us, let’s talk about your house.
