The History of Real Estate IRAs

It used to be that an employee went to work for an employer and then stayed for most, if not all, of his/her career.  Upon retirement, the employee was rewarded with a pension (defined benefit pension plan) for their loyalty toward the business.  The booming economic times of the 1950s and 1960s fostered the growth of the defined benefit pension plan -- a plan which “promised” a fixed monthly payment for life. An employer could credit workers for “past service” and thus encourage the retirement of older, less productive workers. As pension funds grew, financial abuses followed.

Mismanagement and abuse of pension funds left many Americans with less to retire on.  The Employee Retirement Income Security Act of 1974 (otherwise known as ERISA) passed the responsibility of retirement saving from the employer to the employee. As part of this act, IRAs (both traditional and self-directed IRAs) were created to provide individuals with the ability to direct how, where and when their retirement funds were invested.  IRAs were initially marketed directly to consumers by banks and brokerages that specialized in securities (stocks, bonds & mutual funds) transactions (stocks, bonds, and mutual funds).

Due to the overwhelming growth of the stock market during the following 25 years, IRA investors were content to hold their retirement funds in what are perceived as "traditional investments." This has led to a large misconception that stocks, bonds and mutual funds are the only legal investments to hold inside your IRA. That is simply not true!  It is 100% legal to buy real estate and other non-traditional investments inside a retirement plan. 

It is not uncommon for your financial planner to be unaware of the ability to diversify your portfolio outside the stock market and into more secure investments like real estate.  Banks and brokerage houses don't go out of their way to correct this misconception because that is how they generate revenue; selling stocks, bonds, mutual funds and other securities-based products is how they generate revenue.  Consequently, most investors are never taught about self-directed real estate IRAs.

SUMMARY:  

• Traditional and self-directed IRAs were created when ERISA passed in 1974. 
• The purpose of this law was to give an individual the ability to self-direct their retirement funds into a wide array of investment options including real estate.
• A self-directed real estate IRA is not widely recognized in the financial services community because of their inability to monetize such investments.
• It is 100% legal to use a self-directed IRA to purchase real estate.