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IRA Loans for Real Estate: A Hidden Investment Option

While you must be familiar with the usual real estate financing methods used by investors, there are some fewer common types of loans you may not be aware of. An example of this is an IRA loan. This article will answer all your questions regarding using IRA loan for real estate.

What is an IRA Loan?

First things first, technically you cannot use the term IRA loan; that does not exist. An IRA retirement account holder cannot actually borrow funds from their IRA account. However, what is possible is an indirect rollover. What happens is that the individual can instead roll over or withdraw to another eligible IRA or put it back. This allows you to take a short-term loan from your IRA.

An IRA loan is often used in real estate, but it is not an accurate label because IRS regulations do not allow it. The confusion stays because you can borrow from other retirement accounts, like the 401(k) plans. Nonetheless, it is still possible to leverage IRA funds when investing in real estate. This section will look at the available options to buy real estate with an IRA loan.

Alternative to IRA Loan

Using funds from an IRA to finance investment property is not possible directly, but you can still access your funds for the same. Here are some ways how you can do that:

1. 60-Day Rollover

The 60-day IRA rollover is an attractive option for many real estate investors as they can take out a loan against their IRA. As the name implies, this provides access to funds from the IRA for 60 days. However, this is only permitted once every 12 months, and if you do not redeposit the money within the allotted time frame, you have to pay hefty penalties and taxes.

2. Penalty-free IRA Withdrawals

Since you cannot get an IRA loan for real estate, you could consider taking out a tax-free withdrawal instead. The IRA rules allow tax-free withdrawals in certain situations, which might include:

• Disability

• New home buyers

• Higher education

• Premiums for health insurance

• Some medical expenses

Make sure to check out the rules for eligibility for each of these expenses. 

3. Roth IRAs

If you have a Roth IRA, you are always permitted to withdraw the money you’ve contributed (but not on your gains) without incurring any penalties. 

Therefore, you can convert your traditional IRA into a Roth to buy an investment property without borrowing against your IRA. It also has after-tax contributions, so you do not have to bear any tax penalties or liabilities. Nonetheless, it is essential to consult an expert to guarantee a smooth process.

4. Self-Directed IRAs

A self-directed IRA (SDIRA) offers a variety of investment options. They hold alternative investments which you can self-manage. By opening an SDIRA, you can invest your money in real estate by following the IRA regulations. It is a direct and simple method for an IRA loan.

How to Invest in Real Estate with the Funds from Your IRA

The easiest way to use your IRA funds for real estate is through an SDIRA. Here’s how to do it:

1. Select a Strategy

Ensure your real estate investment plan is suitable for an SDIRA by keeping in mind it is meant for long-term, income-generating investments and not for short-term strategies.

2. Set Your Account

Establish a self-directed IRA. Owing to the intricate IRS rules, this can be challenging to go through. That is why it is essential to have a certified custodian to interfere in the process of setting up your SDIRA.

3. Transfer Funds

Once the SDIRA is established, the last step is to transfer funds from your IRA retirement account to the newly made SDIRA. The person who set the account for you will give you all the information for the transfer process to make sure it complies with IRS regulations.

Furthermore, the real estate investing process should be an arms-length transaction, meaning the investment properties is under SDIRA’s name, not yours. Your custodian will manage all related transactions made in the account.

Advantages and Disadvantages of Investing in Real Estate Through IRA

Real estate investing has its fair share of advantages and disadvantages, and so does buying properties through your IRA funds. Here are some pros and cons:

Pros

• You will be able to postpone the time to pay your taxes till you select to take out the money

• Real estate investment can aid in broadening your retirement funds

• Income from the rent and appreciation make real estate ideal for IRA investments

Cons

• Undertaking repair work or managing an income property without an expert’s help is not possible

• Tax deductions linked to the rental property or its management will not be able to be claimed

• Understanding and adhering to IRS rules and regulations is difficult, and those not doing so can be subject to penalties

Investing in Real Estate Through IRA, is it the Best Option?

Real estate investment with an IRA could be beneficial if you have the experience and knowledge to evaluate the risks and navigate the tax implications properly. If you feel confident in your ability to do the necessary research and stay compliant with IRS regulations, investing in real estate with IRA funds can be a viable option.

Author Bio

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years, he has turned his focus to self-directed accounts and alternative investments.

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