Real Estate IRA FAQ’s
Question: I’ve never heard of this
before. Is it new?
No, investments in real estate, non-traditional
investments and LLCs have been allowed since the creation of the IRA. However,
only about 2% of all IRA funds are invested outside of stocks, bonds and mutual
funds. Why? Because most investors don’t know they have other options
available. Stockbrokers and bankers have no incentive to explain all the
options to you.
Question:
Why does my current IRA brokerage firm say I can’t buy real estate in my IRA?
Custodians determine the type of assets they will
hold and may not choose to hold all assets the Internal Revenue Service (IRS)
allows. Life insurance contracts and collectibles are the only investment types
prohibited by the IRS as an IRA investment. IRA law does not prohibit investing
in real estate but trustees are not required to offer real estate as an option.
So, just because your broker doesn’t offer real estate as an investment,
doesn’t mean that you can’t do it; it just means that you can’t do it through
that brokerage firm.
Question:
Are there restrictions on the type of property that my IRA can purchase?
No. As long as it is an investment, your IRA can
purchase any type of real estate (raw land, pre-development, commercial,
residential, etc.).
Question:
I’d like to buy a vacation home now and rent it out until I retire, then use it
as my residence during retirement. Is this allowed?
No. This is a common prohibited transaction. You can
never occupy a property purchased with IRA or 401k funds.
Question:
Can my IRA invest in an LLC with other members?
Yes. You, any family members, their IRAs, eligible
401(k)s (or other qualified plans), and unrelated third parties may all be
initial members of an LLC created to purchase real property. Each member’s
interest is held separately within the LLC. Once the initial funding of the LLC
is complete, however, future transactions may be limited due to the prohibited
transaction and self-dealing rules.
Question:
Are there going to be taxes and penalties when I move my IRA into the
Self-Directed IRA?
Absolutely not! You are not taking money out of your
IRA; you are transferring the assets into another type of IRA that allows you
to self-direct the investment choices.
Question:
At what age can I begin to withdraw money from my IRA?
You can begin at the age of 59½.
Question:
I have an old 401k from a former employer. Can I roll it over to a
self-directed IRA for real estate investment?
Though almost all 401k or corporate pension plans
will not allow rollovers for current employees, once an employee leaves, he or
she can rollover their pension plan into an IRA. The full amount does not have
to be rolled over. Only move it to a self-directed account when you are ready
to begin using the IRA for real estate investment.
Question:
Can I buy a fixer-upper with my IRA, use the IRA money to fix it up and then be
the property manager?
Yes. With the Self-Directed IRA you can do all of
these things, check with your custodian to confirm they will hold the property
in your IRA before you make a purchase offer.
Question:
Can I contribute real estate or real estate paper to my IRA?
No. Contributions must be in cash. However, you can
convert a traditional IRA that holds assets other than cash, to a Roth IRA.
Some determination of value will need to be filed with the custodian to set the
value of the conversion for tax purposes.
Question:
Why wouldn’t I go ahead and transfer to a true self-directed custodian?
There is no reason to move the IRA to a
self-directed custodian until you are ready to start using the funds to invest
in real estate investments.
Question:
Can I make a loan to myself from my self-directed IRA to invest in real estate
or must I use other people's IRA funds?
You cannot borrow from your own IRA personally or
through entities you control. This is a prohibited transaction. Even if the
money will be used to purchase an investment, neither can you personally loan
money to the IRA to purchase property in the IRA. However, you can borrow money
from someone else’s IRA to fund the purchase of a property for yourself as long
as that individual is not considered a disqualified person. Likewise, you could
loan money from your IRA to someone who is not a disqualified person.
Question:
When must I start distributions from my Roth IRA?
Unlike the traditional IRA where distributions must
start at age 70½, there is no requirement to make distributions from a Roth IRA
during the life of the owner. Only upon death must distributions begin to the
beneficiaries.
Question:
When can I begin an IRA for my child or grandchild? Are there age limitations?
Great idea! There are no age limitations, but the
child must have earned income to qualify. The IRS sets some strict criteria to
assure the child really did do work at a reasonable wage. Just two years of
$3,000 contributions to an IRA starting when the child is 13 in an account that
averages a 10% return will be over $1,000,000 when the child reaches 65!
Question:
What am I not allowed to do with real estate in my IRA?
Your
IRA cannot directly or indirectly buy real estate from a "disqualified
person".
Who
is a disqualified person?
The IRA
owner; The IRA owner's spouse, descendant (e.g., son), or ascendant (e.g.,
mother); Spouse of a descendant of the IRA holder; A fiduciary of the IRA or
person providing services to the IRA (e.g., the trustee or custodian); An
entity at least 50% of which is owned (or at least 50% of the beneficial
interests are held) by a combination of the above (e.g., if you and your spouse
own 50% of an LLC, that LLC is a disqualified person with respect to your IRA);
or a 10% owner, officer, or director or highly compensated employee of such an
entity.
Question:
Where can I get a non-recourse loan for my IRA to buy property?
There are at least four sources for financing which
do not violate the non-recourse requirements for IRAs.
1. Seller financing. Most sellers understand that if
the loan goes into default they get the property back anyway, so asking for the
loan to be non-recourse should not be too difficult to negotiate.
2. Private financing from financial friends. If you
cultivate a reputation as a professional real estate investor, there should be
no reason that your financial friends would not loan your IRA money on a
non-recourse basis, either from their own funds or from their own IRAs.
3. Banks and hard money lenders. Non-recourse loans
are not the norm; so many banks will turn you down. However, there are a few
banks that make these types of loans, and at least one bank, which lends in all
50 states.
4. Finally, as mentioned above, you could take over
a property subject to an existing loan, provided the originator of the loan is
not you or another disqualified person.
Question:
Is a Roth IRA a smart estate-planning tool when I plan on leaving the assets to
my children?
Yes. The Roth IRA continues tax-free compounding
even after you pass away. The children can get distributions tax-free over
their projected lifetimes. For example, just $30,000 left to a six-year old at
a 10% annualized return will generate over $4.6 million in distributions over
the child’s lifetime!
Question:
What is a Simplified Employee Pension (SEP) plan?
A SEP, also known as a SEP-IRA, is a retirement plan
established by an employer. A one-person business is considered an employer for
these purposes and may establish a SEP. An employer can use this SEP plan to
make contributions to the IRAs of eligible employees, including himself or
herself.
Question:
Who is eligible to establish a SEP?
Any employer, including a sole proprietor,
partnership, or corporation, can establish a SEP. The corporation may either be
a for-profit corporation or a nonprofit corporation. A governmental entity may
also establish a SEP. When a self-employed individual sponsors a SEP, he or she
is considered to be both the employer and an employee.
Question:
What are Prohibited Transactions?
An understanding of prohibited transactions is very
important. The IRS defines a prohibited transaction as follows: “Generally a
prohibited transaction is any improper use of your IRA account or annuity by
you, your beneficiary or any disqualified person. Disqualified persons include
your fiduciary and members or your family (spouse, ancestor, linear descendant,
and any spouse of linear descendant).” IRS Publication 590 IRC 4975 is the
section that lays out the rules on prohibited transactions. Prohibited
transactions generally involve one of the following: (1) doing business with a
disqualified person; (2) benefiting someone other than the IRA; (3) loaning
money to a disqualified person; or (4) investing in a prohibited investment.
You need to make sure that it is your IRA that benefits from a transaction
rather than you personally. Beware of any “self dealing” transactions.
Question:
How do custodians make their money?
Each year you are charged a fee for simply having an
account with a custodian. A custodian generates revenue in a variety of ways:
Asset based fees – a fee based off the value
of your account holdings.
Transactional
fees – a fee for processing a purchase or sale of account assets.
Holding
fees – a fee on each asset held in your account.
Special
fees – escrow fees, bank-wire fees, overnight mail fees.
While believed to be accurate, any and all self-directed IRA investments should be conducted and verified with a qualified custodian. SkipJack Marketing recommends The Entrust Group which has offices nationwide.
For a free CD packed with more information, click here.
SkipJack
Marketing specifically recommends:
13
Rockland Terrace Ste. 300
Verona, NJ 07044
Phone
Number (973) 857-8058
Fax
Number (973) 857-8880
Toll
Free Number (888) 857-8058
Main
contact: Aida Reluzco; Account Representative
or: Jennifer Bzik; Account Manager
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