Rules to Remember When Using a Self-Directed IRA to Invest

Most people live under the assumption that retirement funds cannot be touched until, well, retirement. To be fair, this assumption is true in many cases. You can’t withdraw from an IRA, 401k or other retirement account early just for the heck of it - not without incurring penalties, anyway. However, there are also instances where you can take funds from your retirement account, and one of those is when you want to purchase investment property.

But wait - before you can start house hunting, there are some rules you need to familiarize yourself with first. Using a self-directed IRA to buy property isn’t your average home buying experience. Here are a few things you need to know before getting started:

1. The income you make off the investment property must be paid back into the IRA. That’s right, you can’t use that money now. The whole point of purchasing the property is to provide additional funds for your retirement, so it follows that any money you make must be stashed away for the future.
2. The property must be occupied by tenants full-time. Why? So that it’s generating a steady income, and that money can go back into the IRA.
3. You can’t enjoy any “indirect benefits” from acquisition of the property. In other words, you can’t use your IRA to purchase property that you would use in some way. You can’t live in the property you buy, and neither can your family because that would be a conflict of interest. You also can’t use the IRA funds to buy a vacation rental, and then use it for your own enjoyment, even if it’s just a couple weeks out of the year. If you’re buying commercial real estate, you can’t set up shop in the property purchased by your IRA, either.
4. Your IRA must be used to pay for any expenses related to the property. Maintenance, repairs, HOA fees, property taxes, and any other property expenses must be paid from the IRA.
5. Your IRA holds the title to the property. When using a self-directed IRA to buy real estate, the property is owned by the IRA, not you, and the title will read accordingly.

If these sound like rules you can live with, great! Using a self-directed IRA to purchase investment property is an excellent way to build wealth long-term and ensure a more comfortable future for yourself. There are lots of benefits to this method of investing, and one of the biggest is that taxes are deferred on the income generated from the property. What does this mean? It means all that sweet cash flow is going back into your nest egg TAX-FREE!

Once you decide to go for it, start by setting up a self-directed IRA or using an existing one, and decide how much you plan to withdraw from it. After you find the perfect property, you can use the IRA to purchase the property outright, or take out a non-recourse loan to finance it. After closing, sit back, let those rent payment come in, and watch your IRA grow!