Borrowing Against an IRA???

Question

I've been hearing some murmurs lately about people using their IRAs as collateral (?) to "borrow" funds to use for down payments / rehab financing for real estate projects. A family member of mine passed away a few years ago and willed to me part of their IRA and Pension (now a "beneficiary IRA").

Is there was a way to borrow against / use these funds for real-estate projects without incurring the usual penalty for early withdrawal? What other tax issues / pitfalls should I look out for / be aware of if this is something I look to do?

Thanks so much everyone!

-Dan

Dmitriy Fomichenko · Answer

@Dan Barman

the IRS rules DO NOT allow you to borrow from an IRA or use an IRA as a collateral for a loan. Here is a link to the IRS website for reference:

https://www.irs.gov/retirement-plans/retirement-pl...

What you can do is rollover your inherited IRA into self-directed IRA. When you do so you can make investments inside of the IRA to acquire real estate or any other type of alternative investments (the only exception would be collectibles and life insurance contacts). However, the investments will belong to an IRA, not to you personally. You can not use it for your own benefits, all of the gains, income and profits must go back into an IRA. You can finance the purchase of an investment property in an IRA, however you can not use conventional financing, you have to use non-recourse loan only. There are only handful of national lenders who offer such financing, here is a list for some of the major ones:

https://www.biggerpockets.com/blogs/2810/50272-lis...

You can also get a private loan from individual investors, just remember that loan must be non-recourse. Hope this helps.

Mark Nolan · Answer

@Dan Barman

It is not always a good idea to invest in a beneficiary IRA in real estate as beneficiary IRAs are subject to required distributions based on the beneficiary's age. If you do invest the beneficiary IRA in real estate, make sure you have enough funds in that IRA to satisfy that annual distribution or part of the beneficiary IRA owned property will need to be distributed in-kind to beneficiary IRA owner which can be costly and cumbersome. See following for more information.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary

Dmitriy Fomichenko · Answer

@Dan Barman

any IRA can be self-directed (including inherited IRA). You will need a special custodian who would allow you to have a such account. There are number of companies out there. Here is a list of companies that BiggerPockets has put together, check it out:

https://www.biggerpockets.com/rei/self-directed-ir...

You are correct, when you buy inside of the IRA the investment is made for the benefit of the IRA not you personally. Of course, as the beneficiary of the IRA you ultimately benefit from the investment. With Traditional or Roth IRA you are allowed to start pulling distributions at age 59.5 but with the inherited IRA it's different. Generally, you must take distributions during your lifetime or within five years after the original account holder passed away. With an Inherited Traditional IRA, you'll pay taxes on any distributions you take. So in your case because it it an Inherited IRA you will be able to benefit from it now (through distributions) not having to wait until retirement.

The IRA would be the property owner, not you. This does not effect your ability to write off any expenses since you personally don't incur any expenses, the IRA must pay all related expenses.

Regarding financing: as I mentioned in my earlier post the IRA can not be used as a collateral. Non-recourse loan means that the underlying property is the only security for the loan. For this reason most lenders will require larger down-payment (typically 40%). So if you default and the lender has to foreclose they can only take the property, they can not touch your IRA or personal assets, they don't have a recourse agains those.

The subject or self-directed IRA is a frequent discussion here on the forum so I would suggest you simply search related keywords and start reading previous discussions, there is enough content to keep you busy for days :-). Also feel free to reach out to my privately and I can provide you some additional resources.

Brian Rich · Answer

https://udirectira.com/library/self-directed-ira/

Andrew Postell · Answer

@Dan Barman an IRA is treated differently than a 401(k).  You can borrow from an IRA but you have 60 calendar days to repay it or it's treated as a distribution.  If you are below 59 1/2 then that's an extra 10% fee on top of your tax liability.  This is a federal requirement.  And you have to pay back to the same IRA fund.  HOWEVER...you can take a one time $10,000 withdrawal to do a first-time home purchase.  But I can't seem to find out if that qualifies only for a home you are living in or not.  I'm sure more research on that area would uncover the difference.  I hope this information helps.  Thanks!

Dan Barman · Answer

Thanks @Brian Eastman!

Brian Eastman · Answer

@Dan Barman

Your assumption is 100% correct.  The IRA works just like any other, just invested differently.

Dan Barman · Answer

@Mark Nolan, question for you...

If I use a bene IRA to invest in RE and there is monthly cashflow, that profit would be placed back into the IRA account, but then I could pull from that profit to satisfy the required minimum distribution each year correct? Obviously we'd want to make sure there was enough money left in the account to cover that RMD in case the market has a bad year or two etc., but generally would this would be a workable game plan?

Thanks so much!!!

Dan Barman · Answer

This is all great @Dmitriy Fomichenko, thanks so much for the info! I'll be doing some searching and reading on all of this in the next few weeks. Fantastic!

-Dan

Borrowing Against an IRA???

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