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Financial Planning for Owners : Real Estate IRA
The Real Estate IRA - Some Strategies

Because the Real Estate IRA is best used when real property is bought for cash it requires large funds in IRAs. Although it is possible to leverage or mortgage real estate within the IRA it gets complicated and may have taxable consequences. This is one reason why its important to be sure to have good tax advisers and administrator to help you set this up.

Rollovers

Many people will have more than one retirement plan because of job changes. It is easy to roll or merge all your retirement accounts into one account. This is done at little or no cost and can increase the amount of cash available for a real estate purchase. It also serves the purpose of simplifying your holding so that you may more easily keep track of them.

A transfer occurs when you move your existing pension plan to a new administrator without being in receipt of the money. Basically you have a new custodian. A rollover occurs when you actually move monies from one account into another. Done properly this is not a taxable event, money is moving from trustee to trustee and it is not a distribution of funds.

Some Complications
  • Be careful to remain within IRS guidelines. You can put 401(k) money into an existing traditional IRA and continue making contributions. Or, you can move your 401(k) account to a new IRA and then transfer that into a Roth IRA. Always check with your advisor, tax law is complicated and changing all the time. You should use these articles as a guide.
  • You just can't go directly from a 401(k) to a Roth. Roth IRAs hold after tax money and are therefore kept separate from pre tax money such as IRAs and 401Ks.
  • Contact your plan administrator or HR to be sure you are eligible to roll funds from your plan. Especially if you are still employed with that company and verify that the correct procedures are followed.
  • Your new plan may not accept rollovers from certain types of plans, or it may not accept after-tax money. Paperwork and procedures are not standardized from company to company.
  • Participating in your new plan means you are subject to new investment, exchange and withdrawal rules.
  • If you have an outstanding loan with the plan you wish to roll, often, but not always you will be required to repay the loan before you roll the account. Please consult with your administrator.
  • The new plan administrator may have higher fees. There is a lot to think about, but the rewards are high.
Strategies
  • Rollovers:  Merge all retirement accounts to maximize the cash amount available for purchase. If your IRA now has lots of cash, or stock that can be sold for cash, you can pay cash for the real estate. That, of course, gets you around the UBIT problem because Leveraging or mortgaging to buy a property is a taxable event in an IRA.
  • The Roth IRA: Consider rolling over traditional IRA dollars into the Roth. If that doesnt provide sufficient cash (or if you dont already have a traditional IRA), consider rolling your 401(k) or pension dollars into a new IRA and then do a second rollover to create a Roth IRA. . Profits earned within the Roth IRA including rents and all the gain on any sale of the property, normally escape taxation. But, if you had the dollars in the Roth for at least five years and are either 59 or disabled, all the dollars come out tax-free. You wont owe taxes at distribution. This makes a Roth IRA extremely attractive if you anticipate that your real estate investments will appreciate. The drawback to creating a Roth IRA from existing IRA or other plans is you are going to be hit with tax on the earnings built up in the retirement account when you roll over to the Roth. This should be a major consideration in your decision process. Generally, the younger you are the better it is as strategic choice because you have more time to build up assets and then at 59 they can distribute tax free.
  • What if you don't have enough cash in the account? Its possible to buy a fractional interest in property.
  • Mortgage: You can borrow or mortgage and pay the unrelated business tax (UBIT). Do the calculations, it may be that the tax deferral with a tax free distribution makes it all worth while. A good financial planner or adviser can help you with the calculations.
  • Partners: Its possible to buy a property with other partners. Separate IRA accounts also can be pooled as limited liability corporations or partnership. Individuals with smaller plan assets or people who are younger and havent had the time to accumulate large retirement holdings can partner up to buy property.
  • Mandatory Distributions: At 70 you must take distributions. Many properties do not throw off enough rental income. The penalty on not taking the distribution or taking a partial distribution is onerous. If you find that there is not enough cash in the IRA to provide for a distribution, you may try to re-finance or sell the property.

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