Seeking Guidance-using self directed IRA to finance down payment

[Elizabeth Conklin]

Looking for resources or guidance about pros and cons of using IRA or other retirement accounts for REI. Thanks!!

[Brian Eastman]

@Elizabeth Conklin

It sounds as if your goal is to use retirement funds to fuel your own real estate investing, such as making a down payment on a property YOU want to purchase as an investment.  If so, that is not possible.

With a self-directed IRA or Solo 401(k), the plan can invest in real estate, but there can be no co-mingling of funds or provision of benefit between the plan and you or close family referred to as disqualified persons. Everything must be done on a stand-alone basis within the envelope of the IRA and exclusively for the benefit of the IRA. The IRA is tax-sheltered, which is why these restrictions apply.

Many investors will choose to establish a self-directed retirement plan and invest in something like a rental property, mortgage note, real estate syndication, etc. as a means to better protect and grow their retirement savings. If you feel you can produce better long-term returns for your IRA in alternative assets like real estate than you can in the stock market, then this is a topic worth exploring.

A plan can use debt-financing such as a mortgage, but that is a more complex strategy. The mortgage must be non-recourse, meaning no personal guarantee from you. The property is qualifying for they loan, not you. The IRA funded portion of the deal is fully tax-sheltered back to the IRA. The portion of the income the IRA receives as a result of the borrowed money is taxable to the IRA. The tax typically does not add up to that much and your IRA will still reap the rewards of a higher, leveraged return, but having to do a tax return for your IRA is not something everyone wants to do... even if the returns are typically better than a comparable all-cash opportunity.