Estimated reading time: 3 minutes
For November's webinar, we covered 7 mistakes Real Estate IRA investors make. Participants who joined our national webinar had the opportunity to ask John Paul Ruiz, our Director of Professional Development at Entrust, questions regarding their self-directed IRA plans for personal use and as business owners. Continue reading to see what types of questions were answered:
Q: Once you retire, can you keep the investment? Or do you need to liquidate everything?
A: Investments under a retirement plan are never forced to be sold upon reaching retirement age.
Q: Can you purchase your parents’ home, and then rent it back to them?
A: Unfortunately, your IRA cannot purchase a parent’s home since your parent is a disqualified party. Engaging with them will be considered a prohibited transaction and will disqualify the IRA. This means that the IRA will cease to be an IRA. Meaning, the property will be taxable as of January 1 of the year in which the prohibited transaction occurred.
Q: Can I purchase a property in my IRA, and then resell the property myself?
A: You can definitely purchase a property yourself and resell the property. You may not benefit personally from the sale (e.g., commissions, etc.). All proceeds from the sale has to go back into the IRA.
Q: I know I can pay taxes on a Traditional IRA to make it a Roth IRA. But if I buy a property in a Roth IRA, is all income tax-free?
A: You are correct. Converting your Traditional IRA to a Roth IRA is a great way to enjoy earnings on the Roth IRA, which will eventually be distributed tax-free. In order for the earnings on the Roth to be distributed tax-free you must satisfy the qualified distribution criteria (must have a Roth for 5 years and attain 59 ½ or become disabled or death or purchase a first time home (maximum tax free earnings of $10,000).
Q: If I have an LLC and it has yet to be used, may I designate that for this purpose?
A: Typically, only newly formed and newly funded LLCs are used for this purpose. Consult with your tax or legal advisor.
Q: Can you expound on the earnings from rent being tax free?
A: Rental income received from a property outside an IRA is typically taxed on a Schedule E (i.e., rents and royalties). If a rental property is owned by an IRA, as the IRA receives the rental income, the income is not taxed since an IRA is a tax-deferred account. Depending on the IRA used to purchase the property, taxation will only come when the income is distributed.
Q: Is there a minimum amount of time the IRA must hold the property? Example: someone wants to purchase an IRA at age 64.
A: No. There is no minimum amount of time.
Q: If I earn short-term interest in a Roth IRA, is that taxed when a distribution is made from the Roth?
A: Earnings are not taxed if the Roth IRA holder has satisfied the qualified distribution criteria. If not, distribution of earning are taxed and subject to a penalty.
Q: Can you purchase tax liens with an IRA?
A: Yes, you can purchase tax liens with an IRA.
Q: Can I buy Bitcoin or other cryptocurrency with my IRA?
A: There is currently no prohibition against that type of invesment.
Thank you to everyone who participated in our webinar. We encourage our readers to post any additional questions regarding self-directed IRAs or retirement planning in the comments section below. You can view the full recording of this webinar here to get answers to questions which are not listed in this article.