David Moore with IRA Advantage examines what kind of real estate investments you can make with a self-directed IRA or a solo 401K. There is power in being an informed investor. Learn about the range of your investment options to put your retirement accounts to work for you.
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What Kind of Real Estate Investments Can You Make with a Self-Directed IRA or Solo 401K?
Here’s the bottom line: Any time you’re taking a self-directed account, those accounts are going to allow you to buy anything the law allows. By law, IRAs can buy anything other than collectibles, life insurance contracts, or stock in a sub-S Corp. And the way the law works, if it’s not specifically prohibited, it’s therefore allowed. So, since real estate is not prohibited, it is allowed.
401K plans are even more liberal than self-directed IRAs are, and the only restriction with a solo 401K plan is collectibles. Once again, if it’s not specifically prohibited, it’s therefore allowed. Real estate is not prohibited. So when we look at that real estate, it’s got to be something acquired for investment purposes and there cannot be any personal use. So you couldn’t buy a second home. You couldn’t buy a home to use in any way. You couldn’t buy a home for a kid to use. You couldn’t buy an office building for your business to occupy. But if you wanted to go out and buy a rental house, that would be fine. Land is fine. Office buildings are fine. Any investment piece of property is going to be totally okay, as long as there’s not a benefit to a disqualified party.
When I look at a retirement account, I’ve got two issues that I’ve got to look at. One, what does the person want to buy? Two, who are they transacting between or for the benefit of? And as long as we’re not worried about that investment, we’re just looking at the benefit of that investment. That is going to be the trigger point. Any investment that benefits a disqualified party would be a prohibited transaction. So, once again, you can’t buy the office building to occupy. You couldn’t buy a building or land adjacent to your property to park trucks on. You can’t go out and buy a property for your son to live in while he’s in college. Those would all constitute prohibited transactions because of the disqualified party use. Keep in mind that siblings, aunts, uncles, and cousins are not disqualified parties.
So, when we’re looking at these issues, keep in mind these questions: What does a person want to buy? Who are they transacting between or for the benefit of? Always look at it from that context and that’s going to tell you what you can and can’t do.
To wrap it up, you can’t buy a home to live in. You can’t buy a second home to use. You CAN be a co-owner of a property along with your retirement account, but that does not entitle you to use the property half the time.
In short, any personal benefit to a disqualified party would constitute a prohibited transaction. Just stay away from it. Don’t get in trouble. Don’t take those chances. It’s your retirement account. Be careful with it. Do the right thing and you’re going to be just fine.
The Upsides and Downsides of a Checkbook IRA
The bright side of a checkbook IRA is that you have full control, power of the pen, and it’s the same for a solo 401K. The downside is you have the opportunity to make a problem for yourself, so you’ve got to be diligent to do the right things. My advice is that every time you pull out a check you think, what am I writing that check for? And, who am I transacting between or for the benefit of? And you’re going to be just fine with those checks if you keep that in mind.
When we are doing a new checkbook IRA for our clients, we encourage them to be careful about the name. We have found that clients often want to use their name directly in the LLC name. For instance, Sally Smith wants the name it Sally Smith LLC. The problem with that is you can get confused about what check you’re using for what, whose money it is, and what’s happening. So we encourage our clients to come up with a name that means something that’s fun for them and that will remind them it belongs to the retirement account. With a checkbook IRA, the only time you’re going to get the benefit is at the end of the day via distribution.
Many call themselves IRA experts. Be sure you’re dealing with true professionals when it comes to your retirement planning. Give the IRA experts at IRA Advantage a call today! 503-619-0223