Your retirement funds help you make the most of your golden years. But what if you can use them to invest in them. You might wonder if you can use your retirement funds to buy real estate.
The good news is, it’s possible.
Many people are exploring real estate to grow their retirement savings.
This blog will explain how to invest in real estate using retirement accounts. You’ll learn the benefits, risks, and steps involved so you can make an informed decision.
How to Use Retirement Funds to Buy Real Estate
If you’re considering buying real estate with your retirement funds, you should know which accounts allow it.
Standard retirement accounts have strict rules that don’t make real estate investing easy.
You can buy real estate using retirement funds from standard IRAs if you qualify as a first-time homebuyer. The IRS defines this as someone who hasn’t owned a home at any point in the past two years.
Standard Traditional IRAs
Traditional IRAs allow you to withdraw up to $10,000 to purchase a new home for first-time homebuyers. However, you’ll still need to pay income tax on your withdrawals. Another limitation is that $10,000 is a lifetime limit. You can’t use it again, even if you have another IRA.
Standard Roth IRAs
With a Roth IRA, you can withdraw the money you’ve contributed anytime, tax and penalty-free. You’ve already paid taxes on it.
What happens once you’ve used up your contributions? You can take out up to $10,000 of earnings or converted money without a 10% penalty for a first-time home purchase.
However, if your Roth IRA is less than five years old, you’ll owe taxes on the earnings. If it’s been at least five years, you can withdraw the earnings tax and penalty-free as long as it’s for buying or building a home.
Other Options
A regular 401k plan and IRA might not be the best options, when using retirement funds for real estate. Consider asking your financial advisor what would be the best option for you.
If you want to purchase real estate as an investment for retirement income, common options include:
- self-directed IRA (SDIRA)
- self-directed 401k
Self-Directed IRA as Retirement Funds for Real Estates
The most popular choice is a self-directed IRA. This type of account lets you invest in things like:
- real estate
- precious metals
- venture capital
- hedge funds
It gives you more flexibility compared to a standard IRA or 401k.
A Guide to Buying Real Estate Using Retirement Funds from an IRA
There are some important rules for using retirement funds for real estate:
- You can’t personally enjoy the property (so you can’t use it as a vacation home or second home).
- All transactions need to be at arm’s length. This means you can’t buy a property from yourself or a family member, and you can’t manage the property. You’ll need to hire a property manager for repairs and rent collection.
- The rental income or profits from a sale goes into your IRA, helping you grow your retirement savings.
- You don’t own your real estate—the IRA is the owner.
- The IRA doesn’t pay taxes, so you cannot take advantage of any deductions from owning the property.
- Maintenance costs don’t come out of your pocket; your IRA handles them. Unfortunately, this can eat into your savings because these funds won’t appreciate. If you need to deposit funds to cover expenses, you are forced to pay penalties.
- You need to have a custodian. A custodian is a company that helps manage your self-directed IRA. They handle the paperwork and ensure everything follows IRS rules.
Self-Directed 401k as Retirement Funds for Real Estates
A Self-directed 401k is like a regular 401(k), giving you more control over your investments. It allows you to invest retirement funds in real estate and a wider range of assets beyond stocks, bonds, and mutual funds. With a Self-Directed 401(k), you can invest in things like:
- Real estate
- Private businesses
- Precious metals
- Tax liens
This type of 401k is often used by self-employed individuals or small business owners. They typically have higher contribution limits than a traditional IRA.
A Guide to Buying Real Estate Using Retirement Funds from a 401k
These are some rules and restrictions to keep in mind when you buy real estate using retirement funds:
- Like other 401ks, the money you invest grows tax-deferred, meaning you won’t pay taxes on the gains until you withdraw in retirement.
- Just like a Self-Directed IRA, you can’t use your real estate investments personally (e.g., no living in a property you bought with 401k funds).
- You can make this purchase using a non-recourse loan. The loan must come from an independent body like a bank.
- Unlike an IRA, you avoid Unrelated Business Taxable Income (UBTI) and Unrelated Debt-Financed Income (UDFI), which is taxable at 40%.
- Solo 401k plans offer asset protection. Your real estate investment is safe from bankruptcy and creditor claims.
Frequently Asked Questions
Can I Use IRA to Buy Real Estate?
Yes, you can buy real estate using retirement funds from an IRA. If you qualify as a first-time home buyer, you can use regular IRAs. If you want to invest retirement funds in real estate as a source of income, you need a self-directed IRA.
Can I Buy Land with My 401k without Penalty?
Yes, you can use buy real estate with retirement funds from a self-directed 401k plan. However, there are restricts as you can’t purchase from family members. You also can’t personally use.
Can You Use Retirement Funds to Buy Real Estate?
Yes, you can use retirement funds to buy real estate. However, you should know which accounts allow this. A self-directed IRA is the most common option.
Invest Wisely for long-Term Security
Investing in your future comes with a lot of tough questions. Thankfully, with the right team at your side, you can get answers. Work with the experts at Asset Preservation Wealth & Tax to find your ideal solution.
We’re a fiduciary firm that takes a holistic approach to financial planning. We consider taxes, your goals, and legal requirements.
Work with a trusted team today!
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
