Iowa real estate retirement planning

Should Iowans Include Real Estate in Their Retirement Plan?

Investing in real estate is one of many ways to set aside funds for retirement. If diversifying your savings is a golden-year goal, then including real estate could be an advantageous strategy. 

Iowa is perhaps one of the most retiree friendly states in the United States. Its low cost of living and substantial tax benefits are two of the main reasons why people choose to retire in the Hawkeye state. On top of that, its pleasant summers, local food options and good-willed people make it a welcoming destination to live out your retirement years.

Many Iowans and Americans alike continue to seek new and beneficial ways to help build their nest egg. Are you looking to use funds to invest in real estate? There are advantages and disadvantages that come with property investments, along with different options to consider, including real estate.

If you’re in the process of retiring and looking for ways to  strengthen your retirement plan, Johnson Wealth and Income Management can help. Here’s what you need to know about including real estate in your retirement plan.

Real Estate & Retirement

Including real estate in your retirement plan might consist of:

  • Selling your home.
  • Owning a rental property.
  • Purchasing and selling property.
  • Contributing to a real estate fund.

While real estate may not be the first asset that comes to mind when looking for retirement income options, it can be an important bridge to retirement for those falling behind on their savings. This is mainly because real estate is such an inefficient market, and it’s possible to find amazing bargains with very high returns on investment. While there are other pros to consider, there’s also  drawbacks to be cautious of, such as not being in a position to make a property purchase.

If you don’t have the cash to make such a large down payment, consider using your IRA funds.

Iowa Self-Directed IRA

Most people are unaware that you have investment types available for retirement. The IRS allows different types of investments within a retirement account. An Iowa Self-Directed IRA gives you the opportunity and freedom to have options in investments for retirement. This plan gives you the option to invest in things like gold or real estate if you wish to do that. 

Here’s a look at some of the various retirement account options available:

  • Traditional Self-Directed IRA: A retirement account in which you can invest pre-tax or after-tax dollars, and in which your investments grow tax-deferred, meaning you will pay taxes on them once you begin withdrawing them. When you start making retirement withdrawals – defined as withdrawals after you turn 59.5 years old – the money is treated as income.
  • Self-Directed Roth IRA: Similar to a Traditional IRA, except you make after-tax dollar contributions so you are paying taxes on the front end. This allows your investments to grow tax-free. After the account has been established for 5 years and after you turn 59½, your withdrawals are tax and penalty-free.
  • Traditional 401(k): A qualified plan that allows employees to make pre-tax elective deferrals. Business owners who want to self-direct can use these as well and allow employees to self-direct their accounts.
  • Self-Directed SEP IRA: Simplified Employee Pension that allows employers to make contributions to the retirement of their employees. An employer can also contribute to their own retirement with a Self-Directed SEP IRA.
  • Self-Directed SIMPLE IRA: Savings Incentive Match Plan for Employees. A “tax-favored” plan that small businesses and individuals can set up for their employees.
  • Self-Directed Solo 401(k): A 401(k) plan that a self-employed individual can use for retirement that offers high contribution limits.

A Self-Directed IRA allows you to invest in almost anything, including real estate. A real estate investment fund combines sources of capital from multiple investors for the purpose of making real estate investments. Almost all real estate investment funds use debt or leverage as part of their investment strategy, which could allow for greater purchasing power.

Real Estate IRA Investments

People who invest in real estate tend to do so because they want more control over their investments and don’t want to be limited by the options provided by traditional retirement accounts. One of the easiest ways to use your Iowa Self-Directed Real Estate IRA is by investing in apartment buildings, commercial property, retail space, raw land and more. 

These types of investments help provide an immediate income stream and can help you grow your portfolio at a faster rate than other traditional investment options (because they are often easier to sell off than stocks or bonds). As mentioned, you can also use leverage when purchasing non-recourse loans with your Iowa Self-Directed IRA which allows you to borrow money from another source such as a bank or credit union without having any personal liability on that loan.

With all of these benefits, it’s no wonder why many investors choose this type of retirement account over others. It’s important to note that while this is an option available to everyone, it may not always be the best investment for you. If you’re interested in investing in real estate, make sure to discuss it with your trusted financial advisor first. They can give you all the information you need to proceed with the next steps.

Benefits of Investing in a Real Estate Fund

There are many advantages to using funds to invest in real estate. A few notable ones:

  1. Diversification: Most real estate investment funds offer investors broad exposure to the real estate sector. They typically own many property types or invest in several different REITs. That diversification helps reduce risk, though it can also lower an investor’s return potential.
  2. Lower initial investment threshold: Most real estate funds have relatively low initial investment thresholds (usually less than $10,000 for a mutual fund and not much more than $100 for most real estate ETFs). That provides investors with a much lower entry point than if they bought individual properties.
  3. Passive investing: While real estate enables investors to generate passive income as tenants pay rent, being a landlord requires active management. On the other hand, real estate funds are much more hands-off investments since others handle the active management of the properties.

Financial Considerations for Iowa Self-Directed IRAs

It’s no surprise that the cost of living in Iowa is low. While the average home price is $178,000, property taxes are relatively high with rates up to 1.5%. Property taxes do throw a wet blanket on returns from rental properties, in or out of Iowa Self-Directed Real Estate IRAs.

For your own personal owner-occupied residence in Iowa, you may be eligible for a homestead tax credit of $4,850, which is subtracted from your home’s assessed value. This is typically worth $100-200 or so for the average homeowner in Iowa.

What’s more, you’ll need to help ensure you have adequate savings for unwelcome surprises. You never know when the AC might break, the roof could leak, or a pest problem could turn up.  Finally, it’s worth noting that before you decide to include real estate in your investment plan, remember it is a lot of work being a landlord. Finding tenants, processing their applications, running background checks and property management is definitely time consuming. Be sure you have the time and will to take on such a project.

Retiring in Iowa With Johnson Wealth and Income Management

Rental real estate can be a good source of retirement income. If you’re interested in retirement and want to explore your options in Iowa, a Self-Directed IRA might be the best option for you. An Iowa Self-Directed IRA can help you manage your investments under your own control—all while enjoying the tax benefits of a retirement account.

Are you interested in retiring in Iowa? Want to learn more about how to take advantage of all of the retirement capabilities you have? Then it’s time to think about a Self-Directed IRA. If you’re looking for an experienced firm that can provide income planning with the utmost level of care and professionalism, look no further. Johnson Wealth and Income Management is here to help you every step of the way.

Whether you’re living in or near Clear Lake, Iowa, Humboldt, Iowa or anywhere in the Midwest, our Fiduciary advisors are ready to help you take charge of your financial future. We’re proud to say that Clear Lake has been voted the #1 place to live in Iowa and Humboldt has been voted the #4 place to live in Iowa!

If you’re looking for a friendly atmosphere and personalized service, we’re confident that you’ll feel right at home when you step through our doors. For more information contact us today.


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