With a bleak national economy, many investors are looking for alternatives to maximizing their earnings and retirement savings. A novel way is to use your IRA or 401(k) to purchase a property. Ideally, you can use some of your retirement funds to purchase real estate and earn tax-deferred income from those properties. However, using retirement funds to invest in real estate isn’t necessarily a total goldmine—with the benefits come several caveats.
Who can use IRA’s or 401(k)’s to buy real estate?
Most people who are full-time employees and can prove firm financial standing are eligible to purchase real estate with retirement funds from their 401(k)’s or IRA’s.
What types of properties can I purchase with my retirement accounts?
It is important to realize that this feature of IRA and 401(k) accounts is purely a tool for investment—not home-buying. That is, you can purchase rental homes, condominiums, raw land, and commercial real estate. But you cannot use your retirement accounts to purchase your home or even any other home that you intend to spend time in (that includes vacation beach condos and ski lodges). And you cannot get around this stipulation by putting the homes in a relative’s name: purchases for relatives are also prohibited.
Nevertheless, you can “invest” in a home that you intend to use upon retirement, so long as you prove it is for investment purposes by renting or leasing it out to an outside party for the meantime.
How can you begin to buy real estate with your retirement accounts?
In order to set out independently as a real estate entrepreneur, you must set up a self-directed IRA, which allows you to direct your own retirement funds. You will need consultation from an approved IRA custodian.
What are the drawbacks of purchasing property with an IRA or 401(k)?
First, you do not have unlimited access to your retirement accounts (this is a government safeguard for your own good!) You may be limited to a $10,000 withdrawal, and you may be subject to tax penalties if you withdraw before you are 59½.
Another important caveat is that that you do not borrow from your IRA or 401(k), you withdraw. That is, once you take the money out, you can never get it back. If you are like most people, you want to be extremely conservative with your retirement piggy bank, because there is nothing after that money, and once it’s gone, it’s gone. Therefore, you should really only purchase property with your IRA or 401(k) if you will be very financially comfortable upon retirement and if you are absolutely confident that your real estate venture can earn you at least a marginally higher return on your investment account.
You should also keep in mind that once you open a self-directed IRA, you will basically be out on your own. Although you will have an IRA custodian, your money will be in your hands. Only take on this venture if you really feel the entrepreneurial spirit and only if you really want to handle your retirement funds.
Yes, investing in real estate may be a more active and lucrative way to maximize your retirement funds. But you will also be tossing around a very delicate nest egg that can easily fall on the ground in a tough real estate market like this. No matter what, you should consult an independent financial advisor before taking any action.
**Sources: marketwatch.com, activerain.com
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