Can I use my IRA $$ towards buying a house?

Question

I recently rolled my old 403B over into an IRA as I wanted to use the money to trade in the stock market myself. Can I use IRA money towards buying a house? If yes, what company would allow me to do that? If not, what could I do with my IRA to have the money available?
Thank you so much for any input!
Anja

Dawn Anastasi · Answer

i have read how people have invested in real estate via partnering with other investors by providing loans out of their ira. that is something else to read more about.

Jon Holdman · Answer

Yes, you can.  You will need a custodian that does true self directed IRAs.  There are a number of such companies.  Look at some of this posts in this forum where you posted and you'll find names and discussion.

Be aware of the issues with this, though.  First, your IRA is a completely separate entity from you.  It can own a house.  It has to pay for ANY work on the house.  It has to receive any income. YOU cannot contribute any money or time toward the property.  So be sure to hold enough reserves in cash in your IRA to deal with any expense.  You don't want to have a major problem and not have the cash in your IRA to deal with it.  Spending time looking for and buying the house is OK.  But offers must be written in the name of your IRA, not you.  According the attorney I worked worth, doing property management is OK, too.  Many folks here disagree and think that would be contributing labor to your IRA.  You certainly cannot do rehab work or that sort of thing.  You also cannot make any personal use of the property in any way.

When I say "you" that includes all disqualified parties.  That's you, your lineal descendents and ancestors, you spouse, certain parties with financial obligations w.r.t. the IRA and any entity controlled by any of these people.

You and the IRA cannot engage in any transactions.  So, the IRA can't buy a property from or sell a property to you.

Lending is difficult.  It has to be a fully non-recourse loan with ONLY your IRA liable for the loan.  You absolutely cannot sign personally for the loan.  So, the available lenders are few in number.  Down payments are high, typically at least 33%.

If you do get a loan for a rental part of the rental income will be subject to a tax - UDFI - unrelated debt financed income.  There are old posts that discuss this, so search for that term or the related UBIT - unrelated business income tax.  Your IRA will have to file a return and pay this tax.

Finally, with many custodians just paying bills and collecting rents can be troublesome.  Many require you submit requests for checks, let them review the request and then they will issue a check.  Vice versa on the rent.  Rent would be paid to the custodian for benefit of your account.

An option is an IRA LLC where you are the manager of an LLC owned by your IRA.  Makes is easier and faster to deal with checks and such, but you're very much on your own to follow the rules.

Dmitriy Fomichenko · Answer

@Anja Wehrmann

First of all welcome to BP community, you came to the right place to learn all about real estate. @Jon Holdman gave you several great tips about SD IRA and there is much more you can find in discussion here on the BP forum. Spend some time to educate yourself.

Buying a rental house in your IRA is permissible, but if you have savings and can afford to buy it outside of the IRA it might be more beneficial to you since there are no tax benefits of owning rental real estate in your IRA, compared if you own personally. Not to mention Unrelated Debt Finance Income tax on leveraged real estate in your IRA. There are also some other lucrative investment options available for you with an IRA such as investing in trust deeds or using it to offer hard money loans. Of course it all depends on a particular deal, so evaluate potential investment carefully.

Also an alternative to self directed IRA (and to IRA owned LLC) is truly self directed trustee-managed Solo 401k plan, where you can have a checkbook control without the use of LLC and don't need a custodian. This topic has also been discussed so search the forum if you wish to learn more.

Anja Brey · Answer

So I learned today, that I could roll my traditional IRA back into my current employer's 403B and actually take a loan out of it for a rental investment property. I was told that the interest rate would be 4.25%. Repayment of the loan would be an automatic after-tax payroll deduction. Does this seem to be a smart idea as I will end up getting taxed as an employee on the repayment? Any thoughts?

Dave Toelkes · Answer

I believe you can use IRA funds for the down payment to purchase your primary residence if you qualify for a hardship exception.  Consult your IRA custodian for specific details.

You can use your Individual Retirement Account (IRA) money to buy a home, and you may be able to do so penalty-free. If your plan permits, first time buyers can take advantage of the hardship rule of early IRA withdrawal.  If you qualify, you won't have to pay the early distribution tax that normally goes along with early withdrawal from an IRA.

My information may be dated, but the hardship exception may still be available.  If your IRS custodian can't answer the question, perhaps your own CPA can.

Jeff J. · Answer

You can also liquidate it and pay the penalty and tax.

Anja Brey · Answer

@Jeffrey Reyes @Dawn Anastasi @Jon Holdman

Thank you all for your time and input!

Jeffrey Reyes · Answer

@Anja Wehrmann yes you can like others have stated. We have many people that we work with using their SD IRAs to lend, crowd invest in a flip, etc. It all depends on what you want to risk vs reward. I would highly recommend you talk to your CPA or one that is well versed in SD IRAs and other types of plans like that to make sure you are doing what's in your best interest.

Jon Holdman · Answer

@Anja Wehrmann  are you wanting to buy a house to live in?  You can't use IRA funds for that.  Your only choice would be to distribute the funds and pay the taxes and penalties.  For an investment property, its entirely possible.  I don't think its a good idea, but some do.  I think the hassle factor with money coming in and out, the difficulty of financing, and UBIT all combine to make actually owning real estate inside an IRA unattractive.

As @Dawn Anastasi mentions, making loans with IRA funds is a more attractive option.  No UBIT, monthly rent checks or checks to contractors.

Anja Brey · Answer

Thank you, @Loren  Whitney @Jon Holdman  and @Dmitriy Fomichenko for the great information! I appreciate your inputs and welcomes. I will for sure read and learn more from past posts. This is all new to me. Sometimes I think that I should have left my money in the 403B as they would have allowed me to take a small loan out of it towards a house. Too late now and back then I was more interested in the stock market. I have some money for a downpayment, but not quite enough for Bay Area housing prices. My thought was to somehow utilize the money I have in the IRA.

Can I use my IRA $$ towards buying a house?

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