You Can Use Your Self-Directed IRA To Buy A Retirement Home. Here's How.

In my experience, a retirement that you are in charge of makes for a better retirement than one that is financially uncertain.

If you are starting to think about where you’ll be spending your retirement, you’ve probably been growing your IRA for some time. If real estate investing is what has gotten you to where you are now, you might want to think about buying a retirement home from your self-directed IRA, also known as a SDIRA or solo IRA.

You can use a self-directed IRA to purchase your retirement home  before your loving children dump you on the side of the road and run off with their inheritance. Here's how.

What To Know About Buying Your Retirement Home With Your SDIRA

This is one of the great reasons to go with self-directed IRA. Traditional IRAs can hold investments, but you can’t buy a home with them. With a self-directed IRA you can buy an investment property and distribute later for personal use. This is black-belt level stuff. You can rent the property as an investment, so you are still making money off of it until you are ready to retire and move in.

To do this you need to purchase the property through your IRA, which will own it as an investment until you retire. When that time comes, you will distribute the property via title transfer from your self-directed to your traditional IRA.
This makes your retirement home a retirement benefit.

Beware of Prohibited Transactions

You need to avoid prohibited transactions. You cannot use the property. Your family cannot use the property. You do not own the property. It is the IRA’s property. It rents the property; you don't.

The rental income accrues in your account because, I repeat, your IRA owns the property. You can lease the property, of course—that’s how investments work. They make income. You will have to lease it to someone outside the family until it’s been distributed, but after that, your dream home is all yours.

Be Smart About Distributions and Taxes

When you take control of your retirement home, it is an “in kind” distribution and it means taxes are due for traditional IRA’s. If your future retirement home was appraised at $250,000, you will receive a 1099-R for $250,000 from your custodian upon distribution.

Distribution taxes can be high. You might prefer to take partial distributions over time, to spread out the pain, but it’s going to sting no matter what you do and this can be a trap. You need appraisals every year for fair market valuation. These valuations cost money. Whatever you decide, you and your family cannot use the property until it has been 100% distributed.

As with most things retirement related, if you take a distribution before you are 59½, you’re going to pay a penalty. Ten percent is stiff. Be patient.

Do Your Homework Before Buying

This process of home ownership isn’t going to work for everyone. It takes a lot of work, but most things worth doing are a lot of work, including putting yourself in a position to purchase a retirement home in the first place. It is possible, but if you self-direct your IRA investments, make sure you understand relevant investment laws and tax structures.

You need to be like a Boy Scout when it comes to retirement planning. Be prepared.

Last Updated: 
December 8, 2017

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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