“You can’t do that!” Supercharge Your Roth Solo (k) with Real Estate! (Part 3)
- by crv.staff
- 1:31 PM UTC
Following on my last post, a good question to ask yourself when deciding what kind of investments to choose in your self directed retirement plan is, “What can I NOT invest in?” The rules governing allowable investments by Self-Directed IRA’s preclude an IRA’s investment in life insurance, collectibles (artwork, antiques, coins, gems etc.) and S-Corporations. Virtually, all other types of investments are permitted, and thus the range of possible investment choice is nearly unlimited.
Consequently, your Self-Directed IRA or 401(k) can purchase any form of real estate.
There are a few important straightforward, reasonable rules and regulations to follow. Some of the most notable are:
1) The real estate must be an investment property, not a personal residence for you or family members.
2) You are not allowed to personally guarantee a loan for your Self-Directed IRA. You can, however, use a commercial non-recourse loan.
3) When you buy real estate the seller cannot be a “disqualified person”. A disqualified person is yourself, your spouse, your children, your parents or a corporation in which you or any other disqualified person owns a 50% or greater beneficial interest.
4) The Self-Directed IRA is responsible for all expenses related to the asset for the life of the investment. Additionally, any income generated by the asset must be received by the Self-Directed IRA. Although some additional rules apply, the aforementioned are the most pertinent. Not to worry, however: a good Self-Directed IRA Custodian will ensure that you are always in compliance with IRS rules and regulations.
Some additional features of a Self-Directed IRA include the ability to partner with other individuals, their IRA’s, any other qualified or disqualified individual, and even yourself (with your personal non-retirement funds). The Self-Directed IRA is responsible for all expenses related to its asset for the life of the investment.
If your Self-Directed IRA is partnering with another investor, each bill must be paid according the initial established ownership ratio. As previously stated, it is acceptable for your Self-Directed IRA to partner with personal funds or disquali?ed persons. However, it is extremely important to remember that the ownership percentages must be kept constant throughout the deal and all expenses as well as income must be split according to that ratio.
It is also important that the dollar amounts be proportional to percent ownership among all qualified and disqualified persons. Because all property expenses, including taxes, insurance and repairs, must be paid from funds in your Self-Directed IRA, you’ll need liquid funds available in your account. All income generated from the property will be deposited in your Self-Directed IRA account so you can use that money to cover costs. Additionally, you can make annual contributions to your Self-Directed IRA according to federal guidelines.
Investments in your Self-Directed IRA are NOT just limited to individual parcels of land and improved real property. You can even purchase shares of a privately held company, Limited Partnership, Land Trust, C-Corporation, Limited Liability Company, TIC (tenant in common interest), REIT’s and more!
For the long term investors out there, you will be happy to know that you can even choose to withdraw real estate from your Self-Directed IRA and use it as a residence or second home when you reach retirement age. At that time, you can elect either to have the Self-Directed IRA sell the property, or take an in-kind distribution of the property. Under that arrangement, your Self-Directed IRA custodian assigns the property title to you.
You will then have to pay income taxes on the current value of the property (at your then-current tax rate, presumably much lower than during your working years). These taxes are just as you would pay for any distribution from an IRA, regardless of whether the asset is real estate, cash, stocks, bonds or mutual funds. However, if the property was held in a Self-Directed Roth IRA or 401(k), you won’t owe taxes at all!
There is nothing that gives me more pleasure than taking on a challenge such as, “you can’t do that!”
When it comes to helping the millions of Americans who have wanted to invest their retirement plans real estate, “Yes, you can!” is the answer of the day.
Bret G. Dudl, Founder
La Joya Perfecta, Costa Rica, “The Center of Wellness”
This article does not constitute advice. When making investment and tax decisions make sure to speak with your tax advisor or a qualified retirement plan administrator for details.
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