Buy Your Retirement Home in Advance With Your Self-Directed IRA

You probably have your eye on a beautiful retirement home. If not, you may want to think about it. In my experience a retirement that you are in charge of makes for a better retirement than one that is financially pressured.
You can use a self-directed IRA to purchase your retirement home in advance, before your loving children dump you on the side of the road and run off with their inheritance.
If you are starting to think about where you’ll be spending your retirement, you’ve probably been growing your IRA for some time. You might want to think about buying a retirement home from your self-directed IRA.

How Can I Buy My Retirement Home With A Self-Directed IRA?

This is one of the great reasons to go self-directed. 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.

What You Should Know About Buying Your Retirement Home With Your SDIRA

So, now that you know how to buy your retirement home, I’m going to teach you how to decide on the right one and what to watch out for.

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, not you. The rental income accrues in your account because, I repeat, your IRA owns the property. You can lease the property. 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 too 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 59 and a half, you’re going to pay a penalty. Ten percent is stiff. Be patient.

Recap: Do Your Homework on Your Self-Directed IRA Before Buying Your Retirement Home

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.

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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