Introduction:
An effective retirement plan may require managing many accounts and choosing from various financial possibilities. Fortunately, today’s financial world offers many intelligent, straightforward investment and savings possibilities.
Ideally, preparing for retirement should not be unduly hard — but, regrettably, putting together a solid retirement plan might entail juggling many accounts and navigating a slew of investment options. Fortunately, today’s financial world provides various wise and simple investment and savings options.
When someone retires, they are no longer employed.
In the United States, the full retirement age (the age at which an individual can claim full Social Security benefits) is 67.
Investors should be aggressively paying down debt, making maximum contributions to retirement funds (including catch-up contributions), and evaluating asset allocation for shifting investment time horizons and risk profiles as they approach retirement.
Early retirement is often considered at the age of 62, which is the earliest age at which a person can begin receiving Social Security retirement benefits. Social Security typically accounts for 40% of pre-retirement income for those who choose to retire early.
When an individual reaches full retirement age, they are eligible to receive the maximum amount of Social Security payments, usually age 67 if born in 1960 or later. Social Security benefits, however, are lowered for those who choose to retire early.
The total of Social Security benefits paid to an individual is determined by several criteria, including how much was born into the system during working years. When estimating how much other retirement income you will need to live on and, thus, how much you will need to save, the amount of your estimated annual benefits should be included.
Individual Retirement Accounts are one-way investors save for retirement (more commonly referred to as IRAs). These powerful investment vehicles, often tax-advantaged, can help individuals accumulate long-term wealth to fund retirement.
The good news is that using an IRA to invest in Fundrise’s private market real estate is straightforward. That can be significant: at Fundrise, we believe that retirement and real estate investments go hand in hand.
We’ll go over some of the fundamentals of IRA investing and why using an IRA to access real estate investments can be a particularly effective strategy.
Individual Retirement Accounts (IRAs) allow you to save for retirement while deferring taxes. Depending on the form of IRA, it can be either tax-deferred or tax-free.
Traditional and Roth IRAs are the two most frequent types of IRAs. Earnings in an IRA typically grow tax-free, with taxation regulations only applying at the time of first contribution or final withdrawal.
Why is real estate an excellent choice for IRA investments?
IRAs are long-term and illiquid accounts because they are intended to finance retirement, which for most investors is years or even decades away.
Many financial planners see IRAs and real estate investing as an ideal match. Real estate investments are traditionally long-term and relatively illiquid — homes and investment properties aren’t as quickly bought and sold as stocks on an exchange, allowing for the potential for outsized returns through private market opportunities. This is consistent with how IRAs have been designed to optimize their long-term benefits.
Many real estate investments take time to appreciate and provide profits. Because IRA investors often have less need for liquidity during the life of a real estate investment, they are in a position to wait for real estate investments to fully ramp up, stabilize, begin running, and eventually earn their total return.
Not only do real estate investments align with IRAs in terms of time horizon and liquidity, but adding private real estate to your IRA can also provide the account with more profound portfolio diversification. This act allows you to hedge against unavoidable volatility in public markets such as the stock market. Publicly traded investments are prone to significant price movements due to market sentiment or external macroeconomic shocks.
While real estate generally is not immune to economic downturns, private real estate investments resist stock market volatility because they do not trade on a public exchange. Private real estate investments, such as the majority of Fundrise’s products, are not subject to dramatic fluctuations in the general market. However, private real estate investing allows investors to diversify their retirement funds away from the public market.
How can I find out if I qualify to invest in an IRA?
Almost anybody can contribute to an IRA if they have earned income. However, some eligibility requirements are based on your age and income level.
For example, if you do not have earned income in a particular year, you will most likely be unable to contribute to your IRA that year. In contrast, if your income exceeds a specific level, you may not be able to contribute directly to a Roth IRA or deduct your Traditional IRA contributions at the end of the year. Furthermore, if you are over 70-and-a-half, you are no longer eligible to invest in a Traditional IRA.
How much can I put into an IRA?
The total amount of IRA contributions you can make across all your IRAs is less than $6,000 each year (or $7,000 if you are over 50) or your yearly earned income.
If you are over 50, your maximum IRA contribution is increased — this is known as a “catch-up contribution,” and it is a way for the IRS to show that it understands you may not have as much as you would have liked younger years.
A contribution to an IRA is “new money” deposited into the account. You may be able to contribute to IRAs at different financial institutions. However, remember that the IRS yearly contribution restrictions apply to all your IRAs, regardless of the institution or custodian.
Traditional Individual Retirement Accounts
According to the IRS, a Traditional IRA is a pre-tax retirement account in which returns are traditionally calculated on a tax-deferred basis.
Taxes can be deducted early in this form of retirement account, subject to IRS deduction limits. Earnings in a pre-tax Traditional IRA are computed on a tax-deferred basis, which means you’ll start paying taxes when you start pulling money out in retirement. You should not get yearly tax forms from a Traditional IRA unless you take an early distribution. Early distributions are susceptible to potential taxation and early distribution penalties due to the upfront tax advantages of a Traditional IRA.
When you take a distribution from a Traditional IRA, you should anticipate paying taxes on the amount distributed in the same year as the distribution, depending on your tax circumstances.
If you have a Traditional IRA, you must begin drawing Required Minimum Distributions (RMDs) in the tax year you turn 70-and-a-half, according to IRS regulations. The IRS begins requiring this form of IRA payout to ensure that you start withdrawing your retirement money so that they can begin collecting taxes on your pre-tax account distributions each year.
We do not foresee being able to expressly accommodate RMDs on our platform due to the illiquid nature of Fundrise’s investments.
Roth Individual Retirement Accounts
Taxes are paid on this form of a retirement account after the contribution was made in the tax year. Because earnings are calculated on a tax-exempt basis in a Roth IRA, a Roth IRA participant should not expect yearly tax forms to be generated. If you take a distribution from a Roth IRA, you should not anticipate paying taxes on the amount distributed, assuming you meet the Roth IRA distribution conditions.
Roth IRA money can be kept in an IRA for the rest of your life, and there are no requirements to remove funds at a certain age with Roth IRAs.
Which IRA kind is best for you?
Your situation will primarily determine whether you should form a Traditional or Roth IRA. Always remember that before investing, you should consult your financial advisor, and the information provided here should not be interpreted as investment advice. Investors should generally examine the following aspects when picking between a Traditional and Roth IRA: existing retirement accounts, eligibility to contribute, and eligibility to deduct contributions. Each of these can significantly impact how an IRA of any type operates.
That being stated, there are a few extra variables to consider while choosing your chosen type of IRA:
Your age and time horizon have traditionally played a big part in defining potential investment options. This may also be a factor when deciding which IRA account type to start. (Your time horizon refers to how long you want to hold the investment and when you anticipate using the funds.) As a result, it’s critical to understand how each IRA type may be taxed differently based on your age and how this may affect you in the future.
After 59-and-a-half, you should be allowed to draw distributions from either form of IRA without penalty (assuming the distribution abides by IRS rules).
However, how you pay taxes on a prospective transfer can vary significantly between accounts. If you take a payout from a Roth IRA after the age of 59-and-a-half, there should be no taxation as long as the IRA had received contributions for at least five years prior because the first contribution was made after tax. On the other hand, taking a distribution from a Traditional IRA after the age of 59-and-a-half would almost certainly result in a taxable event, and the total amount of a prospective distribution would very certainly be the basis for your taxes time.
Aside from the taxes variations for a regular distribution (distribution after the age of 59-and-a-half), there are additional taxation changes for early IRA distributions (distribution before the age of 59-and-a-half) based on your position and IRA type.
A younger IRA participant, for example, or any investor with a long time horizon, may choose a Roth IRA, pay their taxes up front, and benefit from tax-free growth over many years. In such circumstances, a lengthy time horizon may optimize gains because the investor is choosing to pay taxes on their current income, pre-growth, rather than the eventual distribution, which is frequently more considerable. Another approach to look at this issue is to wonder if an investor will be in a lower tax band at the time of investment than at the time of distribution, which will be during retirement. Suppose their tax bracket is projected to be lower today. In that case, many investors will find a Roth IRA more appealing because the account’s structure allows them to make tax payments during a period when they are likely to owe less.
On the other hand, an older IRA investor with a shorter time horizon may determine that a pre-tax IRA is the better option. The reason is that it allows for a larger principal to generate growth during the available investment period, or they may believe that their current income is greater than the amount they plan to take in eventual retirement distributions. Furthermore, if an investor may deduct pre-tax contributions from earned income in a particular year, investing through a Traditional IRA could be an additional benefit.
We’ve made it easier to use an IRA to invest in Fundrise’s private market real estate. You can begin by visiting fundrise.com/ira. We accept investments from Traditional and Roth IRAs established using our platform. Our website handles the whole IRA contribution and transfer process.
While your IRA can be opened and funded through our platform, Millennium Trust Company will be the custodian of your Fundrise IRA.
To learn more about IRA investing with Fundrise, please visit our Help Center or contact our Investor Relations Team anytime.
Visit the IRS website for information on RMDs, IRA eligibility, and distribution regulations. Please consult your CPA or tax professional for any tax information specific to you, as we cannot provide specialized tax advice.
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