Can I use my Traditional IRA to invest in Real Estate?

Question

I have about $20,000 in an IRA I set up right when I enlisted in the Military. I'm wanting to fund my first real estate investment but don't have the cash. Can I use my Traditional IRA to facilitate something like that? And if so what kind of penalties, tax related stuff are invloved? Are there any do's/ don't associated with this?

Dmitriy Fomichenko · Answer

Account Closed,

First, I’d like to thank you for your service to our great country!

If you take a distribution from your IRA now - you will be taxed on the entire distribution amount, plus you’ll have to pay penalties for early IRA withdraw. After you pay those amounts there is not much you going to be left with. Probably not a good choice.

Another option you have is to establish self-directed IRA, move funds over and then have the freedom to invest into alternative assets such as real estate inside of your IRA. Please note however that this will not be your personal investment, IRA will own the property, all income would belong to the IRA and all expenses must be paid from the IRA. You can finance property in your IRA but you must use non-recourse financing.

Brian Eastman · Answer

Account Closed

An IRA can be configured to invest in real estate.  This is what is referred to as a self-directed IRA.  What a self-directed IRA is, is simply an IRA that has broader investment choices.  It is still entirely an IRA, which means that in exchange for tax-sheltered status, all activities must be entirely within the envelope of the IRA and exclusively for the benefit of the IRA.

As such, it is not "you getting to invest in real estate" and have access to this money.  Rather, the IRA is investing in real estate instead of the stock market.  You can control the investments, but that is about it.  You cannot mix IRA and personal funds to invest, benefit from the IRA such as by drawing off income from rents or using the property personally, nor can you add value to the IRA such as by performing work on a property.

With these limitations, it is difficult to put $20K to work in real estate.

Mortgages are possible, but no commercial lender will have an interest in a deal where you only have $20K down  (maybe $50K).

You could joint venture with other investors, perhaps?

There are other alternatives such as tax liens, notes, note funds, real estate crowdfunding and the like that are possible for a self-directed IRA that is just getting started.

Otherwise, your option would be to take an early distribution of the IRA to yourself, in which case you now have full control over the money personally.  You would be taxed at your regular state/federal rates plus a 10% federal penalty for early distribution from the IRA.

George Blower · Answer

@Edward Kiser

The IRS rules allow for investing IRA funds in real estate per the following, but you will need to use the IRA services of an IRA custodian like IRA Services Trust Company, for example.

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

Odie Ayaga · Answer

One other note: you can't perform work for your IRA i.e. you can't buy some 18K property for 20K and do a bunch of the rehab yourself to flip it. It's ideally used for passive investments.

Brian Eastman · Answer

Account Closed

It depends on what you mean by investing in a business.

To invest in your own business, you must use a Rollover as Business Startup (ROBS) plan.  This involves a C-Corp that sponsors a 401k.  You as an owner employee of the company can rollover prior retirement plan funds and then the retirement plan purchases shares of the parent company using an Employee Stock Option Purchase (ESOP).  This vehicles allows you to be actively engaged in the business and draw a salary.  The retirement funds can be used without taxes or penalties in this fashion, but the C-Corp will operate in the normal taxable realm.

To invest in someone else's business, you could use a self-directed IRA.  All investments with such plans must be entirely at arm's length and may not intersect with you or businesses that you or lineal family control.  In a venture capital play where equity growth in the business is the goal, this could work.  If the "prize" is the operating income of the business, however, and the business is not a taxable C-Corp but rather some kind of a pass-through entity like a LLC, then the IRA will be subject to UBIT taxation on the income.  UBIT rates can get to be 37% federal.

So, again, what do you mean when you say "invest in a business"?

Edward Kiser · Answer

Lets say I were to invest in a business, and made some sort of profit.... Would that profit go into the IRA or would that be considered a personal gain?

Edward Kiser · Answer

Thank you gentleman for the advice and prompt replies! Your input and creativity is much apperciated. I will do some more homework on this topic.

George Blower · Answer

@Edward Kiser

The IRS rules allow for investing IRA funds in real estate per the following, but you will need to use the IRA services of an IRA custodian like IRA Services Trust Company, for example.

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

George Blower · Answer

@Odie Ayaga

Good feedback.

Can I use my Traditional IRA to invest in Real Estate?

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