Buying real estate with IRA money: what you need to know

Ginger Dean

June 21, 2013

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

For most people, investments made using their retirement accounts have seen paltry returns over the last few years. And since no one wants to spend their retirement years worrying about money, many people are looking into using their retirement accounts outside of the traditional avenues to make money. Enter real estate. If you're thinking of buying real estate with funds from your IRA (yes, it is legal), here's a step-by-step guide.

1. Choose your IRA

You need to determine whether to use a traditional IRA or Roth IRA for your real estate purchase. Traditional IRAs have tax implications upon withdrawal while Roth IRAs are taxed while you're contributing. With a Roth IRA, there are no taxes during or after withdrawal.

2. Qualify as first-time homebuyer

This is necessary so that you don't get into trouble with the IRS. To clarify, according to the IRS, a first-time homebuyer is someone who has not owned a home for the two years prior to the time he/she will use the IRA funds to purchase a property. This is for traditional IRAs. If you have a Roth IRA account and intend to use that for your purchase, there will be no accompanying taxes or penalties for non first-time homebuyers.

3. Set up

Establish a self-directed IRA and hire a plan administrator who only administers accounts to help you purchase the property using your IRA funds. All withdrawn IRA funds must be used to purchase the property within 120 days of withdrawal.

Pros and cons of using a self-directed IRA

A self-directed IRA requires proper understanding before signing up for or dabbling in it. It is a retirement account that empowers you to make investment decisions solely and without any obligations to anyone. Usually established through a broker or a custodian at your bank of choice, self-directed IRAs are entitled to the same tax benefits as traditional IRA accounts.

The pros of setting up a self-directed IRA include the following

  • You are free to purchase and own real estate -- you can't do this with traditional IRAs.
  • You have flexibility to make investments of your choice.
  • Custodian fees are fixed regardless of how much you have in your account.
  • The account is protected from litigators and creditors.

The cons, however, include these:

  • You have the potential of making bad investment decisions with costly consequences.
  • They are more expensive.
  • They require you to make your own investment decisions, which can be bad if you have no idea of what you're doing.
  • You risk losing tax benefits if you carry out unacceptable transactions.

Pick your poison, but choose wisely.


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