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How Do I Invest My Retirement Funds in Real Estate?

Using your IRA, SEP, or 401(k) plan, is a great way to grow your retirement funds. Heres an overview of whats involved in purchasing real estate within your IRA.

By: Jaime Raskulinecz, CPM

IRA & 401(k) Insights

Using your IRA, SEP, or 401(k) plan, is a great way to grow your retirement funds. Here’s an overview of what’s involved in purchasing real estate within your IRA. As you’ll see, it’s not that difficult. This example assumes a cash deal, rather than borrowing to make the purchase.
 
The first thing you must do is open an account with a self-directed administrator. A self-directed administrator allows you to make any investment allowed by the IRS. This type of administrator does not sell investment products such as stocks or mutual funds nor does the administrator give investment advice. The services provided include record keeping and IRS reporting, quarterly statements, asset servicing, such as bill paying, and receiving income, such as rents.
 
You want to move the funds from your current custodian to the self-directed administrator’s custodial bank to have them available for a real estate deal. When you transfer the funds, make sure that you use forms that maintain the tax-deferred status of your account. In many circumstances, people request a distribution from their account and then roll over these funds to the self-directed administrator within the IRS time limit of 60 days. IRS rules state that the funds can only be rolled over into another account once every 12 months.
 
The Internal Revenue code on IRAs does not tell you what to invest in, but the code does specifically ban investments in collectibles and life insurance. Most of the rules revolve around who you cannot invest with and how the transaction is being conducted. Some of the questions that you need to address are:
 
•    With whom are you investing?
•    Are you personally providing credit to your IRA?
•    Are you deriving personal benefit now for investments made by your IRA?
•    Are you doing business with close family members who might benefit now from your IRA?
•    Is everything being done “arms length” to ensure that the decisions made are in the best interest of the IRA?

Understanding what is considered a prohibited transaction, self-dealing, and disqualified persons, as outlined in IRC 590, is the key to getting it right. The self-directed administrator that you choose should be able to help you navigate the rules to ensure that the transaction is done correctly.
 
The asset that you are purchasing for your plan must be a “new deal,” not one already owned by you or a close family member, although brothers and sisters are okay. It must be purchased for investment—that is, you can’t live in it—and it must be properly titled in the name of your IRA. All income and expenses must flow through the administrator . There is to be no personal use of the property at any time, either by you or a close family member.
 
The sales contract for the purchase of the property must be titled in the name of your IRA, for example, Entrust Northeast FBO John Smith, IRA, and all documents associated with the sale and title transfer must be signed by the administrator. All utilities, insurance, HOA dues, real estate taxes, and contractor contracts must also be in the name of the IRA and signed by the administrator.
 
The key players in your deal must know what is going on from the beginning. This list includes the real estate broker, the title company or real estate attorney, your insurance agent and, most important, the self-directed administrator. Instructions for all the involved parties should be available from the inception of the deal. Questions regarding who will manage the property to ensure the “arms length” nature of this investment and its income stream should be answered early. Options such as using a property manager, bookkeeper, or other non-family member should be explored early.
 
At some point, you will want to reap the benefits of your investment. At age 59½, you can take distributions from your IRA without penalty. At 70½, you are required to take mandatory distributions from a traditional IRA. In the meantime, the income and appreciation have been building in your account tax deferred if you have a traditional IRA, and tax free if you have a Roth IRA.

This is a very basic illustration of how to buy real estate with your IRA. The details of each deal are likely to be different. Consult your self-directed administrator before making an offer on a property so that the paperwork is done correctly from the beginning. When you understand the rules, the process, and the ongoing management issues, the rest is like most other real estate transactions.
 
Here are some questions I often hear when working with clients.
 
Can I stay in the property?
No. Nor can your ascendants or descendents (grandparents, parents, children, grandchildren).
 
Can I use this property for my retirement home and move in at 65?
Yes, providing you distribute the property from your plan prior to doing so. Your accountant can give you details on the tax implications.
 
Can I buy a piece of property and rent it to my business (or son or parents)?
No, this is an example of a prohibited transaction. Your son and parents are considered disqualified persons.
 
More questions? Contact Entrust Northeast, LLC, for self-directed IRA administration. Visit us at www.EntrustNortheast.com for examples of other self-directed investment options, such as mortgages, notes, precious metals, and private placements. Check out our events page for a list of upcoming presentations, workshops, and tradeshows.

Jaime Raskulinecz, CPM, is the CEO of Entrust Northeast, LLC, and a New Jersey licensed real estate broker. Entrust Northeast is a locally owned and operated office that is part of The Entrust Group. Entrust Northeast is one of the few companies in the region that enables investors to harness their IRA assets to purchase a wide array of nontraditional investments. Ms. Raskulinecz has been a successful real estate investor herself for more than 20 years. To contact Entrust Northeast, email Info@EntrustNortheast.com or call 888-857-8058.