Rental Property vs. IRA

Both investments in rental property and contributions to an individual retirement account, or IRA, offer you the opportunity to plan for future monetary needs with current earnings. Each allows you to spend or set aside income to experience financial gain at a later date. If you're just starting out, looking to diversify a retirement portfolio for your golden years, you may choose to invest in either rental property, an IRA or both. In most circumstances this ensures that the IRA is well-funded and a rental property paid off prior to retirement.


With an IRA, employees and the self-employed can save for retirement in an account with a range of tax advantages. Multiple IRA varieties are available, including the IRA, Roth IRA, SEP IRA and simple IRA. Of these, the traditional IRA and Roth IRA are the most commonly referenced. A traditional IRA defers taxation on the income put into the account until withdrawals occur. With a Roth IRA, taxation occurs when money is put into the plan.

Rental Properties

Rental property investments offer an individual a different path to retirement income. Instead of contributing earnings to an IRA, in which the value of the initial investment grows over time, investment in real estate can have long-range benefits, but also offers a monthly income that helps cover the property's monthly expenses. When the rental property is paid off, all income from the property becomes profit and, when well managed, can provide a consistent source of monthly income in retirement. A well-chosen property may also appreciate in value over time in a healthy economy. If this occurs, the property can be leveraged for a home equity loan or sold for a profit to generate a windfall for retirement. When you're considering investing in rental properties while you're still young, decide whether or not you want the responsibility of handling additional tax paperwork and payments, finding renters and keeping up with repairs to multiple properties during your retirement. If you want to keep your rental properties but prefer to take it easy after ending a career, hiring a manager or management firm for a percentage of the property earnings and allows you and your spouse to keep the income stream while outsourcing much of the hassle.

IRAs and Real Estate

The handling of IRAs and real estate don't need to be mutually exclusive activities. Investments in real estate offer IRA holders an opportunity to diversify the account's holdings while exploring an area of interest. An individual can use a self-directed IRA to purchase real estate, provided the IRA is used to pay all property-related expenses and all earnings from the property are diverted to the account. Real estate investment trusts allow account holders the ability to invest in companies in the business of buying, selling and renting real estate. When an investor chooses a variety of trusts with wide-ranging properties, the risk carried with individual real estate investments is diluted. Rental investments in an IRA also let owners defer the taxation of property sales and earnings until a withdrawal of funds is taken in retirement, while holders of stand-alone rental property must pay taxes in the tax year income is earned.


An IRA that invests in rental property must be self-directed to allow the owner the ability to pick properties, handle expenses and manage the profits. Properties on title must carry the name of the IRA instead of the account holder's name, for tax law requirements. Outside of the IRA, rental properties may be held by the individual or by a LLC set up by the property holder. All expenses incurred on the property in a calendar year become tax deductions, while the real estate's structures depreciate in value over 27.5 years for income tax purposes.

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