| You have seen this on the Internet and wonder, "Is it | | | | choose, buy and sell real estate within your IRA. The |
| possible to use your IRA to purchase real estate that | | | | proceeds of each sale go back into your account, |
| you can actually live in?" The answer to that question | | | | tax-free, to be used for the next purchase. There is no |
| is NOT a simple "yes." There are two ways to buy | | | | time limit on how long real estate is held nor is there |
| real estate with your IRA: | | | | any requirement for "like kind" purchases with the |
| #1 Purchasing as personal property but paid for with | | | | proceeds as there is in a Section 1031 Exchange. |
| your account | | | | Taxes occur when you take distributions from the IRA |
| The advertising that states you can buy real estate | | | | at age 59 ½ or later, at which time they are |
| with your IRA and live in it is not actually referring to | | | | taxed at your income tax rate at that time. With this |
| the purchase of real estate within the IRA. What it is | | | | type of investment, however, there is a requirement |
| talking about is a little known rule for IRAs whereby | | | | that this be an investment and that the IRA owner |
| you can take distributions from your Plan before | | | | cannot use it personally while it is still in the IRA. |
| reaching the age of 59 ½ years without penalty. | | | | Which method or real estate purchase is right for you? |
| This type of transaction is called a 72(t) Distribution. | | | | If your intent is to use your IRA now for the purchase |
| In IRS Publication 590, included in the list of allowed | | | | of a second home to use now, for example, the 72(t) |
| distributions without penalty is one in which you | | | | option could be for you. If your attraction to real estate |
| establish an agreement with the IRS for you to take | | | | is for building wealth within a tax-deferred account by |
| equal payments from your IRA account. The IRS | | | | buying and selling for a profit and growing your IRA, |
| states: | | | | then a 72(t) is probably not what you want. The |
| Annuity: You can receive distributions from your | | | | tax-deferred status of IRAs is specifically designed for |
| traditional IRA that are part of a series of substantially | | | | the purpose of tax-free growth. You lose this status |
| equal payments over your life (or your life | | | | when the real estate is purchased outside the IRA and |
| expectancy), or over the lives (or the joint life | | | | funded with taxable distributions from an annuity. |
| expectancies) of you and your beneficiary, without | | | | Are there other options available? |
| having to pay the 10% additional tax, even if you | | | | Must you purchase an annuity contract in order to |
| receive such distributions before you are age 59 | | | | take a 72(t) Distribution? The answer is no. It is |
| ½. You must use an IRS-approved distribution | | | | possible to do a 72(t) Distribution from any IRA, |
| method and you must take at least one distribution | | | | regardless of the assets held. For ease of distribution, |
| annually for this exception to apply. | | | | the investments in the IRA should have sufficient |
| The payments under this exception must generally | | | | liquidity available to make the mandatory distributions. |
| continue until at least 5 years after the date of the first | | | | You, or your advisor, need only to be able to make the |
| payment, or until you reach age 59 ½, whichever | | | | calculation of the required annual distribution amount. It |
| is later. If a change from an approved distribution | | | | is a relatively simple calculation, and most tax advisors |
| method is made before the end of the appropriate | | | | can advise you. Your self-directed custodian can hold |
| period, any payments you receive before you reach | | | | any investment of your choosing for the purposes of |
| age 59 ½ will be subject to the 10% additional | | | | the 72 (t) Distribution-purchasing mortgages, income |
| tax. | | | | property or any cash-producing asset, for example. |
| Those who sell annuities primarily market the 72(t) | | | | Consider that the purchase of an appreciating asset |
| Distribution concept. The IRA is actually investing in an | | | | that also produces cash flow sufficient for your |
| annuity that guarantees a series of payments which | | | | distributions may allow the account to grow for your |
| are taken as distributions. This is how it is used for real | | | | future retirement needs while still funding the 72(t) |
| estate purchases: | | | | Distribution. Making your investments inside a |
| Sellers of annuity contracts will have the individual | | | | self-directed account allows you to keep maximum |
| transfer their annuity based IRA into a self-directed | | | | flexibility rather than locking you into the purchase of |
| IRA , which in turn will purchase an annuity contract | | | | annuity contract. As an example, consider the following |
| that guarantees a fixed payment in order to meet the | | | | for your IRA: |
| required payment agreed upon with the IRS | | | | - Purchase a condo for cash within your IRA for |
| The individual will find a piece of real estate and buy it | | | | $150,000 |
| using a mortgage guaranteed by their personal assets | | | | - Your IRA rents the condo for $800 per month, which |
| with payments from the annuity used to pay the | | | | nets $700 per month cash flow into the IRA. |
| mortgage on the property. | | | | - You determine that the required monthly distribution |
| How is this different from real estate held in your IRA? | | | | for a 72(t) will involve taking $700 per month from your |
| The substantial differences are: | | | | IRA account. |
| 1. You must have enough wealth to guarantee the | | | | - You use the $700 to make payments on your |
| mortgage on the property to begin with. | | | | "second home" mortgage. |
| 2. This is not an IRA investment. The real estate is | | | | - The condo appreciates at a rate of 5% per year, |
| outside of your IRA. Sale of the property, unless it is | | | | making your IRA worth $190,000 in five years even |
| your primary residence, will follow all the rules of any | | | | while paying out the required distributions. |
| investment sale. | | | | - Your IRA is going up in value because it contains real |
| 3. The IRA is being liquidated to make the distribution | | | | estate. |
| payment. You may not put those funds back into the | | | | - You have your second home to use now. |
| IRA after taking them out. | | | | Conclusion |
| 4. There is generally little flexibility on the rate of return | | | | Choosing the right option is important, especially when |
| or how you invest the IRA after the annuity is | | | | one of the choices is electing a 72(t) Distribution which |
| purchased and the 72(t) Distribution election is made. | | | | involves a commitment to the IRS to take mandatory |
| 5. You will be taxed on the distributions at your current | | | | distributions. Seek input from your tax and financial |
| tax rate rather than at your tax rate at retirement. | | | | advisors before embarking on investments either inside |
| 6. You have a mortgage on your credit rating as well | | | | or outside of your IRA in order to quantify the tax |
| as the need to come up with a down payment. | | | | consequences of the various options. For information |
| #2 Purchasing real estate as an investment within your | | | | on self-directed IRAs and the IRS rules applicable to |
| self-directed account | | | | those types of investments contact your local |
| Using a self-directed custodian, you may, if you | | | | self-directed IRA administrator. |