Not able to hold real estate as an investment within an IRA?

[Kurt Bouma]

My financial advisor had this to say in regards to the question of whether or not I could (without penalty) use funds in a self-directed roth IRA as a down payment on an investment property. I have no reason to doubt it's truthfulness but it seems to go against what I've always heard:

"Your Roth IRA's are already classified as self-directed IRA's. You are not able to hold real estate as an investment within an IRA. So unfortunately, the only way to use these assets to purchase real estate would be to pull the money out of the IRA incurring the 10% penalty plus paying the taxes on the growth in the account. I hope this helps but I'm guessing it isn't the answer you were looking for."

Looking for feedback on that from anyone who might confirm or know otherwise...

[Brian Eastman]

@Kurt Bouma

Your financial advisor is flat out wrong.  Either he does not know the IRS rules, or he does and is playing a common Wall Street game of hoping that you don't and will trust his misdirection.  We've seen plenty of both over the years.

An IRA can invest in anything the IRS rules allow for, which excludes life insurance and collectibles. In addition to conventional financial products, that means that real estate, private note transactions, stock of privately held entities, precious metals, cryptocurrencies and a whole lot of other alternatives are available.

A specialty IRA referred to as self-directed is required for alternative asset investing. The basics of the IRA are the same with respect to contribution limits, timelines, etc. What is different is the processing model and the capacity of the IRA custodian to document off-exchange transactions that are more one-off in nature.

As this is still a tax-sheltered IRA, there are rules you will want to educate yourself about with respect to keeping things at arm's length and exclusively for the benefit of the IRA. You cannot benefit personally at the current time, nor can you mix personal and IRA capital. The endeavor is all about diversification for the IRA.

An IRA may use debt-financing such as a mortgage to acquire property. The mortgage must be non-recourse, meaning no personal guarantee from you.

There is a ton of information on this topic here on BP, as well as several professionals who are actively engaged and sharing their expertise.  Do a little reading and then get on the phone with a few providers.

There is a lot to learn, including a variety of plan service types (custodian vs checkbook for example).  Take some time and figure out what will work best for your goals.