Juicing Up Your IRA

Mic

hael Housewert isn't your typical IRA investor. Four years ago, the real estate agent at Charde Group Inc. used $195,000 of the funds in his individual retirement account to purchase a piece of undeveloped land along a sun-washed canal on Marco Island, Fla. He sold the property two months ago for more than three times that amount, tucking a $500,000 profit back into his IRA.

With property values soaring across the country, more and more IRA investors are putting some of their funds directly into real estate instead of just the usual stocks, bonds and mutual funds. Housewert, 58, has put half his retirement savings into investment properties and is considering pumping in even more. "Because of historically low interest rates, the volatility in the stock market and political unrest, people are really starting to look for more tangible assets for their retirement," says Tom Anderson, president of PENSCO Trust Co., an independent custodian of retirement plans. Here are some tips on how to do it:

GETTING STARTED. You can use money in a traditional IRA, Roth IRA or simplified employee pension plan (SEP-IRA) to buy land, condos, commercial real estate or residential properties. But you can't serve as the custodian of your IRA. IRA Resource Associates www.iraresource.com) in Camas, Wash., can help you find a trustee or custodian who is knowledgeable about real estate investing.

RESTRICTIONS. You must ensure that the custodian follows IRS rules, or you could face hefty taxes and penalties. You can't use IRA money to invest in a residence or vacation home. You also can't buy an investment property for or from your spouse, parents or kids. And you can't put a property you already own into your IRA.

TAX CONCERNS. You'll forgo some tax benefits associated with investing in real estate, says Islandia, N.Y., financial planner Michael Kresh. You usually can't deduct depreciation, and when you begin withdrawing money from a traditional IRA or SEP-IRA, those funds will be taxed as regular income. Since a Roth IRA lets you withdraw funds tax free after age 59 1/2, that may be your best option.

Still, Kresh warns, property values could start to slide, and you could be stuck. Also, IRA investors need to think about how they will liquidate those investments when it's time to take required distributions at age 70 1/2. But even if real estate prices taper off a bit, Housewert is convinced that investing his IRA in properties on Florida's sunny coast will lead to brighter days for his retirement savings.

Sharon Epperson is CNBC's personal-finance correspondent