Can you use IRA money to buy real estate? That’s a pretty common question. The answer is “yes”, but there are some guidelines that you must follow.
Your first job is to find an account custodian or trustee that offers the option. Brokers usually stick with stocks, bonds and mutual funds. Banks tend to stick with certificates of deposits.
All of those may be good investment options. But, in order to offer the most diversity, there are a few companies that allow you to use IRA money to buy real estate and other less traditional investment vehicles.
Now, there is another important question and also one that is commonly asked. Can you use IRA money to buy real estate that is intended for personal use, either now or in the future?
The answer is “no”. That would be considered self-dealing or an “indirect benefit”. Government regulations regarding retirement accounts are specific. They want your investment choices to be wise enough to benefit you in the future, but not directly in the present.
You and your close family members are prohibited from living in a house owned by the account. Close family members are sons, daughters, their spouses, your parents, your grandparents and your spouse.
Another question is can you use IRA money to buy real estate that you intend to use for commercial purposes or to conduct your own business in. The answer is again “no”.
If the account owns an office complex, you may not rent an office there. Your family members are also prohibited from doing so. You might wonder why. As long as someone is paying rent, what difference does it make?
No matter how honestly a person conducts their affairs, there could be a tendency to charge less rent to one’s family or oneself. That would affect the account’s income and could risk your ability to support yourself after you retire. The government offers the tax benefits that accompany individual retirement accounts specifically to encourage people to save for their future.
Can you use IRA money to buy real estate and then resell it for a profit? Yes! And, there are some big advantages to doing so.
First of all, there are no immediate taxes. You will pay neither income, state, local, federal or capital gains taxes on profits returned to the account. That could mean a savings of as much as 50%.
Depending on the type of account that you have, you might never pay any taxes on those profits, at all. In a Roth, for example, your contributions to the account are taxed as regular income, but qualified distributions are non-taxable.
Other advantages of using IRA money to buy real estate include compound interest and asset protection. Compound interest is simply interest paid on interest earned. It is compounded interest that allows the account to grow so quickly.
You achieve asset protection, simply by not investing everything in one market or “diversifying”. If you rely solely on the stock market to fund your retirement, you could end up with a lot less money. So, if anyone asks, “can you use IRA money to buy real estate”, now you know the answer.