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Should you invest in real estate with IRA money?

If you plan on using your retirement savings to make an investment, these are the available options when you want to invest in real estate using your IRA.

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brick house

Funds in your IRA are usually off-limits till you reach the age of 59.5 unless you want to pay a 10 percent penalty for early withdrawals. However, there are some exceptions for those who want to use IRA funds to purchase an investment property.

Tapping into your nest egg may seem like the only solution when you’re looking at huge down payments. Still, it’s best to avoid dipping into your retirement fund unless you qualify for the first-time homebuyer exemption, or have no other choice.

Let’s consider the options available when you want to use IRA to buy a house, or build/rebuild your first home.

Using an IRA to buy a home

If you have savings parked in an IRA, here’s how you can use them to buy a home:

  • The first step is to check whether you or your spouse qualify as a first-time homebuyer, i.e., someone who hasn’t owned a primary residence in the last two years.
  • According to the IRS, if you own a cottage or recreational property, or owned a home more than two years back, you still count as a first-time homebuyer.
  • As a first-time homebuyer, you can use up to $10,000 from your traditional IRA without paying an early withdrawal penalty.
  • You can also make a penalty-free $10,000 withdrawal if you’re helping your parent, spouse, child or grandchild buy a house.
  • If you’re buying property jointly with your spouse, both of you can withdraw $10,000 each. This is a lifetime limit and can only be used once.
  • You can use traditional IRA funds for down payments, as well as building/repair costs, financing fees, closing costs and other acquisition expenses.
  • Income tax still applies on your withdrawal, so take federal and state taxes into account while deciding how much to spend on your home.
  • After withdrawing money from a traditional IRA, you face a 10 percent penalty if you don’t begin construction or buy your house within 120 days.

Make sure to keep dated copies of construction/purchase contracts as well as any other documents you’ve signed for your new home.

building a home

There are several available options for you if you plan to use your IRA to buy, build or rebuild your first home. (Source)

Using a Roth IRA to buy a home

Here’s how you can use your Roth IRA savings to pay for a real estate purchase:

  • You can make tax and penalty-free withdrawals at any time but only from contributions, i.e., funds you’ve put into the Roth IRA.
  • Remember, you have already paid the tax on the Roth contributions.
  • Withdrawals are not taxed if you are just withdrawing your contributions not invading any gains.
  • Having said that, if you’re a first-time homebuyer, consider making a withdrawal from your contributions first, so your gains can continue to earn interest.
  • You need to buy or begin construction on your new home within 120 days if you make a withdrawal from Roth IRA earnings.
  • If you don’t qualify as a first-time homebuyer or cannot meet the 120-day limit, draw on contributions instead. These are not restricted, taxed or penalized.
  • Roth IRAs are only available if your annual income is under a certain limit. Use these funds now if you think your income might be higher in the future.

Using a self-directed IRA to purchase real estate

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Converting your IRA into a self-directed IRA (SDIRA) allows you to choose where your contributions are invested. You can use a self-directed IRA to purchase real estate of any kind. However, you and your immediate family cannot benefit from these investments until you’re 59.5 years of age.

This is a great way to make a real estate investment for your golden years. Your renter will pay down the mortgage over the time. As retirement becomes more of a clear reality, you will put in place a distribution policy so when the day comes, the house is yours.

This strategy is not a good one if you want to buy a home and live in it before retirement.

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

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, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, get in touch with Rick.

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