Real Estate IRA Options: Types of Plans

While any form of IRA allows for real estate investment, there are other matters to consider when determining which type of self-directed real estate IRA plan is right for a self-directed IRA holder:

Traditional self-directed IRA: A traditional self-directed real estate IRA allows the IRA holder to deduct contributions up to $4,000 annually ($4,500 if they're age 50 or older in the year 2006) from the IRA holder's income. Once they begin to withdraw money (typically upon retirement), those funds will be taxed as ordinary income.

Self-Directed SEP-IRA: The SEP-IRA is designed for self-employed individuals and small business owners. The IRA holder can contribute up to 25% of their compensation, or $44,000, whichever is less. Keep in mind however that if they have employees, they must make contributions for them as well - these plans demand that the owner offer the same benefits, rights and features to their employees that they have access to. This option is a great alternative for real estate practitioners who can make the higher contributions because they can build up funds more rapidly to purchase properties. Withdrawals from a SEP-IRA are treated like those of a traditional IRA for tax purposes.

Self-Directed ROTH IRA: A Roth IRA gives the self-directed IRA holder no deduction on their current contributions (again, $4,000 or $4,500 depending on age), but it does allow them to withdraw funds tax-free. If they expect to buy a real estate investment in an IRA and hold it for a long period, this is probably their best option, particularly if the property increases in value over that period.

Other types of plans that one should know about:

Conduit IRA: A Conduit IRA only holds amounts rolled over from a qualified retirement plan (401(k)), 403(b) or similar plan, and earnings on those amounts. Prior to recent changes in the tax laws, amounts could be rolled over from an IRA to a qualified retirement plan only if the IRA was a conduit IRA. FYI: Recent changes in the tax laws have loosened this particular restriction.

Coverdell Educational Savings Account: This ia a tax-favored account (formerly called an Education IRA) that is a trust or custodial account established in the United States funded with post-tax contributions to pay for the qualified education expenses of a designated beneficiary. Earnings and withdrawals from a Coverdell account are tax-free if used for those educational purposes. At the time of contributions, the designated beneficiary must be under age 18 or be a special needs beneficiary. Total contributions from all contributors for any one child may not exceed $2,000 per year. Contributions from individuals whose adjusted gross income exceeds $95,000 ($190,000 for married taxpayers filing joint returns) for the year are restricted. Amounts contributed to a Coverdell account do not count against the annual contribution limits for individual IRAs.

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