For many investors, especially high-income professionals, retirement accounts are where the bulk of long-term wealth is stored. Most 401(k)s and IRAs, however, limit you to traditional investments like stocks, bonds, and mutual funds. Over time, this can leave your retirement savings heavily exposed to market volatility.
There’s another option that offers more control and diversification: investing in real estate through a self-directed IRA (SDIRA). If you’ve ever wondered whether you can use retirement funds to invest in real estate, and how it actually works; here’s a clear, practical overview.
1. What Is a Self-Directed IRA?
A self-directed IRA is a retirement account that follows the same basic tax rules as a traditional or Roth IRA, but with one major difference: you choose from a much broader range of investments.With an SDIRA, you can invest in assets such as:
- Real estate (including multifamily properties)
- Private real estate syndications
- Private equity
- Notes and other alternative assets
The account must be held with a specialized custodian who allows alternative investments, but the investment decisions are entirely yours.
2. How Real Estate Investing Works Inside an IRA
When you invest in real estate through a self-directed IRA, the IRA—not you personally—owns the asset. All income generated by the investment flows back into the IRA, and all expenses are paid directly from the IRA. This structure applies whether you’re investing in:
- A single property
- A fractional ownership interest
- A passive position in a multifamily syndication
As long as the investment follows IRS rules, it can grow tax-deferred (traditional SDIRA) or tax-free (Roth SDIRA).
3. The Power of Tax-Advantaged Growth
One of the biggest benefits of using a self-directed IRA for real estate is how returns are treated:
- Traditional SDIRA: Rental income and profits grow tax-deferred until retirement.
- Roth SDIRA: If structured properly, all income and appreciation can be withdrawn tax-free in retirement.
For long-term assets like multifamily real estate, where value is driven by income growth and appreciation, this tax treatment can significantly enhance overall returns.
4. Rules You Must Follow (And Why They Matter)
Self-directed IRAs come with strict rules, and violating them can trigger taxes and penalties. The most important concept is prohibited transactions. You cannot:
- Live in or personally use the property
- Personally manage or repair the asset
- Buy property from, or sell to, yourself or certain family members
This is why many investors use SDIRAs to invest passively in professionally managed real estate deals rather than owning properties outright.
5. Why Passive Multifamily Investing Fits Especially Well
For busy professionals, passive multifamily real estate often aligns best with self-directed IRAs. By investing as a limited partner in a syndication:
- You avoid day-to-day involvement
- Professional operators handle acquisition and management
- Your IRA benefits from consistent cash flow and long-term appreciation
This structure keeps you compliant while allowing your retirement capital to work in real assets, not just paper ones.
6. Is a Self-Directed IRA Right for You?
A self-directed IRA isn’t for everyone. It requires careful planning, the right custodian, and investments that are structured correctly. But for investors who want greater diversification and more control over how their retirement dollars are deployed, it can be a powerful tool. If a large portion of your net worth is tied up in retirement accounts, using a self-directed IRA to access real estate may unlock opportunities you didn’t realize were available.
Final Thought: Expanding What Your Retirement Can Do
Most retirement accounts are designed for simplicity, not optimization. A self-directed IRA allows you to think beyond the stock market and position your retirement savings in income-producing, tangible assets like multifamily real estate.
For investors seeking diversification, long-term growth, and alignment with proven real estate fundamentals, a self-directed IRA can be a strategic bridge between retirement planning and real asset investing—without sacrificing the tax advantages that make IRAs so powerful in the first place.
