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FUNDING YOUR INVESTMENT THROUGH AN IRA

Posted by Mike Jordan on May 29, 2020
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There are numerous ways to acquire investment properties. The most popular ways are with cash, or financing through a lender, or a bank. Another option is through the use of your IRA

You may have never thought about using your IRA to fund a real estate purchase. Or, you think it will be too complicated. By doing your due diligence, and working with a professional, you can get a good understanding of how to utilize your IRA to buy investment real estate.  

FUNDING AN INVESTMENT PROPERTY THROUGH AN IRA

An IRA is a popular retirement investment. Many people have invested money into an IRA, either directly, or by rolling an old 401(k) into one. An IRA is really just a holding entity, that you put an investment into. Inside your IRA, you may be invested in cash, mutual funds, individual stocks, or bonds, even precious metals and real estate. 

To fund the purchase of an investment property through your IRA, you do not use new money. You use the money already inside your IRA. You’ll allocate the funds toward the purchase. The purchase itself is the same process as buying any house. After you close, the property will be in your IRA. The IRA owns the property. 

Another way to use your IRA money is as a lender. You may find an opportunity to lend money to someone who wants to buy a property. The property becomes the collateral for the loan. 

When you use your IRA in a real estate transaction, any income, or profit you make on it is treated with the same tax deferred advantages associated with IRAs. This goes for rental income, or interest you earn, if you lend money out. 

OTHER WAYS TO USE YOUR IRA TO BUY REAL ESTATE

While it’s true that there are penalties if you take withdrawals from your IRA before age 59 ½, there are ways to avoid these fees when purchasing a home. 

Traditional IRA

To qualify for an IRA exemption, you need to be a first-time homebuyer. This can be a very broad definition of what exactly a “first-time” home buyer is. The IRS can qualify you (and your spouse if they also have an account) if you haven’t owned a principal residence at any point in the last 2 years. Owning a vacation home or taking a part-time share on a property still qualifies you for an exemption.

A qualified buyer can withdraw up to $10,000 from their account to use as a downpayment for their purchase without suffering the 10% early withdrawal penalty. This applies for each buyer. Meaning, if you and your spouse have IRA accounts, $20,000 can be withdrawn for you to use on your investment. Take note that you still have to pay for regular income tax upon withdrawal.

Another way to be exempted from the penalty is when you already own a home and you want to help out people close to you so they can purchase a property. This would only apply to your eligible child, grandchild or parents who want to buy a home. So if you want to help out, you can withdraw $10,000 from your IRA to assist them as long as they’re a first-time homebuyer themselves.

Roth IRA

A Roth IRA is an individual retirement account funded with after-tax money.

The rule exemption when using a Roth IRA is a little different from a traditional IRA. Aside from being first-time homebuyers, your account needs to have been open for at least 5 years, counting from the 1st of January of the year you made your first contribution. Once you’ve withdrawn the amount to fund your purchase (a limit of $10,000), you need to use the funds within 120 days

Self-Directed IRA (SDIRA)

This type of retirement account holds a variety of alternatives that are normally prohibited from usual IRAs. The account is directly managed by the account holder, which is usually administered by a custodian or trustee. This may be a bit complex when compared to its counterparts, that’s why this is best suited for experienced investors.

You can convert your regular IRA into an SDIRA to invest in a wider variety of properties. This means that you’re not just limited to houses, but also invest in vacant lots, mobile homes, apartments, or multifamily properties. However, the biggest concern when utilizing funds from an SDIRA account is that it can’t personally benefit you.

What does this mean? You’re not allowed to personally use the property to benefit from it. You and your family aren’t even allowed to use it or live in the purchased home. This is because the account itself owns the home. Using personal funds or sweat equity (personal time) to benefit from the property is prohibited as well.

Based on its limitations, this is ideal when purchasing rental properties. As long as you’re purchasing a piece of real estate that’s not intended for personal use, you can use your SDIRA to fund the purchase. On the flip side, once you turn 59 ½ years old, you could then live in the same home as your personal house.

IS IT A GOOD IDEA TO USE AN IRA?

It really comes down to your understanding, and comfort level. In addition, depending on the properties you plan to purchase, you’ll need to have enough funds in your IRA to purchase the properties. You also have to remember that these funds still play by the IRA rules, and are not accessible until your age 59 ½. 


If you’re still doubting whether or not you should use your IRAs to fund your purchase, worry not. Using an IRA to fund real estate purchases is usually conducted by experienced investors.   You need to do your due diligence, and connect with the right professionals. Strategy Properties is here to help you with all your funding options. We can help you find the right property, and what’s the best way for you to fund the purchase. To learn more about purchasing investment properties, and to look at our great ROI homes for sale, call us at (734) 224-5454 or reach out to us via email at info@strategyproperties.com.

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