3 Facts About Real Estate in Retirement Plans

As Americans hear and read more about the struggling Social Security and Medicare systems and their trust funds, they become more amenable to participation in other retirement plans. Congress has passed retirement related legislation with advantages to entice people to invest in their own retirement plans. Business retirement plans are often the first way in which the average person gets involved. In the past decade.

With savings and bond interest rates low and somewhat higher concern about the stock market’s performance over the next decade, rental real estate is gaining in popularity with investors. This is especially true with home prices rising and fewer people than ever able to fund the down payment required to buy a home in a period of low inventories. The many financial, cash flow, and tax advantages of real estate is a topic for another article, but they are quite attractive.

Not all IRS qualified business and individual retirement plans can invest in real estate, and some require jumping through some hoops to do so. This is the current state of tax regulations as they relate to real estate investment in retirement plans.

  1. Which Retirement Plans Can Hold Real Estate as an Investment?

While corporate defined benefit pension plans are not allowed to invest in real estate, some 401(k) plans may use existing assets to purchase real estatei if properly set up to do so. Many IRAs, SEPs, Roth IRAs, and Keoghs have fewer limitations and can invest in real estate if the plan is set up properlyii.

A self-directed IRA can use an independent trust company to serve as the IRA trustee and then direct the trustee in how to invest the funds and purchase real estate. There are strict rules, and it is critical to follow them to keep the retirement plan viable and avoid penalties.

ERISA, Employment Retirement Income Security Act of 1974, under which 401(k) and corporate pension plans are formed and regulated, has much stricter regulation, and lenders are often reluctant to loan funds to purchase real estate in those plans. However, for IRAs and Roth IRAs that are self-directed, real estate can be an asset for building a better retirement.

  1. What Types of Real Estate are Allowed in the IRAs?

Though rental real estate, especially single-family homes, duplexes, multi-unit homes, and apartments are the most popular retirement plan investments, the self-directed IRA can also invest in raw land, subdivided and improved land, commercial property, and co-ops. The biggest caution is that a property cannot be one you already own personally or even one you bought if you ever used it as a personal residence.

  1. Using Debt to Acquire Real Estate in the IRA.

You can use debt to acquire real estate in the IRA, but there is a hitch that makes many lenders resistant to issuing mortgages on properties in retirement accounts. Legally, the lender can use ONLY the property in the account as collateral a non-recourse loan. In the event of default, the lender cannot move against any other assets in the plan or account. A high down payment can overcome this resistance with some lenders, but it is not certain that you can get a mortgage in this way.

There are other ways to purchase properties for your IRA, however:

  • Seller financing – using online resources and real estate agents, you can locate properties that sellers are willing to take back a note for funding. This is something those entering retirement and wanting to downsize their residence find an interesting option. This is because they receive a monthly cash flow payment that would exceed the return on the money if placed in a savings account.

  • Private money – you can seek out a friend or private investor who wants the better cash flow over savings interest. They can purchase the property and then sell it into the IRA.

There are benefits to businesses in setting up retirement plans for employees and leveraging through real estate investment can lead to more comfortable retirement lifestyles.

i Real Estate in Tax-Qualified Retirement Plans, Independent Actuaries, Inc.

ii Real Estate and Retirement Plans, RichDad.com


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