New investor can I use my traditional IRA to invest in RE?

Question

I’m a first time investor and I was wondering if I can use my traditional IRA with Fidelity to invest in Real Estate? There is an opportunity I’m looking into but it seems when I research on line about using my IRA it seems that it’s a difficult thing to do. Do any of you have experience in that? Any advice would be appreciated.

Brian Eastman · Answer

@Adriana Rego

You can use a self-directed IRA to invest in real estate.  Be sure to understand, however, that it is the IRA investing in real estate, not you.  The IRA owns the property, pays all expenses and receives all income.  You do not benefit in any way, and are limited in how involved you can be with the real estate.

This is simply taking that hands-off, tax sheltered money and moving it from what Fidelity sells to investing it in real estate.

As a newbie, are you the best fund manager for your IRA and the best real estate operator?  Maybe once you have a handle on real estate investing, diversifying your IRA into real estate could make sense.  Otherwise perhaps looking into real estate backed funds/syndicates or mortgage notes would be a safer bet by allowing you to leverage the experience of professionals.

Adriana Rego · Answer

@Yolanda Salas thank you Yolanda! Great advice.

Adriana Rego · Answer

@Taylor L. I appreciate the advice and referral. I will look into it

Adriana Rego · Answer

@Mark Sewell thank you!

Adriana Rego · Answer

@Matt Millard thanks for the advice

Dmitriy Fomichenko · Answer

@Adriana Rego,

If you decide to use leverage keep in mind that portion of the rent proceeds would be subject to Unrelated Business Income Tax. You can avoid that by using self-directed Solo 401k instead, if you are eligible.

George Blower · Answer

If you are self-employed with no full-time w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.

Solo 401k vs. Self-directed IRA

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

• Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
• Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLCowned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Yolanda Salas · Answer

@Adriana Rego It's very important to learn as much as you can before taking the plunge in using IRA funds for real estate investment.  I use Fidelity for my Self Employed 401K and IRA and Pensco for my Self-directed IRA.    I still invest in traditional markets and send funds to the SDIRA to buy real estate and other alternative assets as needed.

Start learning by reading about Self directed IRA from reputable companies.  Many of these companies have recorded seminars that are informative. There is a book available on Amazon written in 2013 by Sorensen that may be helpful.  The self directed IRA handbook.

As I mentioned before - I used a portion of my previous employers 401 (sitting in Fidelity) to rollover into my SDIRA with Pensco, purchased small rental income homes, sold,  and now hold notes.  I also hold land and other assets. The land will be built with multifamily within the IRA to generate rental income in the IRA.  I anticipate I will begin receiving distributions from the IRA in the next three years or so (and then begin paying Uncle Sam).

The reason to become educated is so you don't inadvertently make mistakes in self dealing - which would invalidate the tax status of the investment.  Your IRA Custodian will guide you but you need to make sure you understand all the nuances as well.

I am a big advocate for SDIRA - its a great wealth building tool, but its only 1 tool. Good luck!

Taylor L. · Answer

You'll have to move the money from Fidelity to a Self Directed IRA custodian and into a self directed IRA. I use Quest Trust Company, they're good but they're not the only one. It's not difficult to do. I use mine to invest in multifamily and self storage syndications, and I have investors in my deals using their retirement plans as well. I like syndications as SDIRA investments because it's easy to avoid self-dealing and transactions with prohibited individuals

Mark Sewell · Answer

Look for self directed IRA companies or local trust companies in your area - they probably have some meetups, and/or some education seminars or something like this.

New investor can I use my traditional IRA to invest in RE?

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