Bloomberg
Many people accumulate a fair sum in retirement plans and IRAs. The tax advantages these accounts afford come with strings attached. There are some things you cannot or should not buy in an IRA money.
Q. I'm looking to buy a house but I will need to use some IRA money to do it. Can I buy the property inside the IRA and thus avoid the taxes on withdrawing from the IRA first? -Sam
A. Sam, if the house is your personal residence, the answer is "no." There are a significant number of "prohibited transactions" that can cause the entire IRA to become taxable. Among these are buying a property for which there are incidents of personal use as would be the case with a personal residence or a second home.
Even if a property is strictly for investment purposes, there are things to consider and other hoops to jump through.
First, since you stated you need IRA money to buy the property, you should consider whether your personal finances are strong enough to buy property at all.
I'll leave that to you but take note of the following if you do decide to try to own property directly in your IRA.
Neither you nor a family member can use or transact with the property.
If you need financing, it will be harder to get because traditional mortgages can't be used.
You will need to work use a custodian for the IRA that will work with direct owned real estate.
Unless, you can contribute to the IRA, or rollover money into the IRA, all the funds to keep the property over the years must be in the IRA already. This would include things like maintenance, insurance, and real estate taxes.
If you are approaching age 70½, you will need to pay for a proper valuation of the property to calculate an accurate Required Minimum Distribution (RMD). If you do not have enough cash in your IRAs to make your RMD each year, you may be forced to sell the property to raise the cash or face a penalty of 50% of the RMD shortfall.
Most custodians that will hold a property will provide you with information about the ins and outs, but their disclosure materials usually place the responsibility for complying with all the rules (prohibited transactions, self-dealing, and others) squarely on your shoulders. Be cautious and hire a good lawyer you find independently of any company encouraging you to use your IRA to buy property.
Reader questions on all things retirement answered Mondays and Fridays. If you have a question for Dan, please email him at: RetireQA@marketwatch.com
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Dan Moisand's comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you. Some questions are edited for brevity.
