Can IRA money be used to buy real estate? 5 questions and answers you need to know
Question #1: Can you use IRA money to buy real estate of all kinds or is it limited to certain types of investments?
Except for some prohibited transactions, you can use your self-directed retirement account to invest in almost anything. There are certain steps you need to take to make this work for you. Here’s a brief look at the necessary steps.
First, you need a self-directed account. Most companies do not offer the self-directed approach. They may allow you to select from a variety of different stocks, money markets, mutual funds, etc. But they don’t let you get out of those traditional investment picks. It’s also a shame, because with today’s market, people are risking their financial future by sticking to the “tried and true.”
You should compare the options the custodian offers, as well as the fees it charges. You want a large, experienced company that charges a reasonable annual fee and a small fee to open the account. You want to avoid companies that charge transaction fees. They can really add up. Once you’ve found the right custodian, there are a few more important questions to answer.
Question #2: Can you use the money in the IRA to buy real estate that currently belongs to you or a close family member?
Although this is a frequently asked question, the answer is “no.” It would be considered a sole proprietorship or indirect benefit and would disqualify the investment as tax-free or tax-deferred. You could be penalized with the total purchase price. It’s best to keep your dealings at “arms’ length” so that you are not “personally” involved in the transaction.
Question #3: Can you use the money in the IRA to buy real estate and then use the property to earn rental income for the account?
Yes! This is one of the most popular options. The account will purchase the property and pay all fees associated with the purchase; closing costs, necessary repairs, maintenance payroll, etc.
All income must be paid directly to the account. Tenants must be informed “to whom” to make the check payable. It would read something like this; Pay to the order of the FBO Company Custodian (for the benefit of) Joe Smith’s individual retirement account.
Question #4 – Can you use IRA money to buy real estate if you don’t have real estate experience?
If you can. You can learn by trial and error, like I did, or you can get involved with a company that makes it easier for you, like I am doing now.
Immediately after transferring to a self-directed account is one of the best times to start. Your account usually has more cash at that time, so there’s no need to liquidate stocks and other assets. Today would not be a good time to liquidate shares.
Question #5: Can you use the money in an IRA to buy real estate and earn a higher rate of return?
The answer is definitely, probably twice as long, as long as you make the right choices. Given today’s market with all the foreclosures, there may never be an opportunity like there is now for wealth accumulation.