Something your stockbroker won't tell you-you can purchase the retirement home of your dreams with your IRA.
Traditional and Roth IRAs can purchase all kinds of property, from single family homes to apartment complexes.
By owning real estate, you diversify away from stocks and bonds and keep ahead of inflation. Returns for real estate average 14% a year, versus the 12% 30-year average for stocks. (According to Ibbotson Associates)
Although banks and brokerage firms typically don't offer this alternative-it is costly to administer-it's easy to add a real estate strategy to your retirement plan.
Reasonable allocation now: 25% of your retirement assets.
Beware: If you buy a home for retirement, you can't live in it until you take its entire value as a distribution from your IRA after age 59½. Until then, rent it out to a permissible third party. Profits are reinvested in your IRA.
Transfer your existing IRA or roll money over from a qualified plan-401k or a pension-to a self directed IRA. It should be overseen by a custodian, such as a bank, which receives an annual fee of .5% to 1.5% of assets. Fees decline as assets increase.
You will also need a property manager to maintain and rent out the property to tenants. You are not legally permitted to manage it yourself because the IRS considers you a "disqualified party."
If you don't have enough cash in your IRA to purchase a property outright, invest your money in a limited liability corporation (LLC). The LLC invests in the property. There are no restrictions on eligible investors. For instance, the LLC can buy property with your IRA and/or spouse's IRA as well as non-retirement accounts belonging to you and your spouse.
If you want to rent the property to family members consult a tax attorney. If you violate IRS rules, you will pay tax on the entire investment. IRS rules are tricky.
You can not lease the property to parties that have been disqualifies by the IRS, such as yourself, children, spouse, grandchildren or their spouses. The law does allow you to lease the property to siblings, cousins, uncles and aunts. You also can name a sibling, etc., to manage the property. You pay that person a salary.
You can not use IRA owned property as collateral for a home equity loan or line of credit.
You can not use non-IRA funds to pay for expenses such as, insurance, taxes and repairs.
Exception: Legal fees. Make sure the property generates enough income to cover these costs. If necessary, you could transfer money from other IRAs to your self directed IRA in order to cover these expenses.
To keep legal fees down use, only use an attorney to draw up and review documents, not to negotiate deals. It is best to pay legal fees with non-IRA money so that you can deduct the cost from your taxes.
If you move into the property after the age of 59½, you must take it as a distribution from you IRA and pay tax based on the current value of the property. Plan for the tax- it could be sizable. If the property is in a Roth IRA, you pay no taxes.
As always, consult a tax attorney or certified financial advisor for more specific details and information.
Noel Padilla
'Doing Business Right'
Kendall Short Sale Foreclosure Specialist
