- The IRS is clear: You cannot leverage your IRA in any way. This is different from the employer-based retirement plans such as a 401k plan, in which you often can borrow up to $50,000, provided it does not exceed 50 percent of your 401k value while still employed. However, you cannot take a loan directly from an IRA. You cannot open a margin account and borrow money for securities. You cannot use it as collateral in any other loan. If you do and get caught, the entire IRA is considered distributed as of January 1 in the year the loan was taken. Any taxes and early distribution penalties are applied to the entire IRA balance.
- The IRS allows investment real estate to be bought and held within an IRA. Investment real estate includes open land, rental homes or commercial property. For many investors, it might not be feasible to buy real estate without obtaining a mortgage for the property. In this case, a Limited Liability Corporation (LLC) is opened and partnered with the real estate IRA. The LLC obtains the mortgage and deals with any taxable income that comes from the property. The funds used by the IRA to buy the property are protected from taxes, but the income from the part that is mortgaged is not. For example, if a property is purchased for $100,000, and $30,000 of the price comes from IRA funds and the rest from a mortgage, only the $30,000 gets the tax shelter.
- If you have enough in the IRA to pay cash for the property, you can. You won't need an LLC to partner with, and all the earnings grow under the tax shelter. The caveat is the property must never be used for personal use. Personal use goes beyond your personal use. Your spouse, children, grandchildren and siblings cannot live in, rent or lease the property. You cannot buy a property from your IRA, and you cannot sell into your IRA something you or your family members own. No "sweat equity" -- a party's contribution to a project in the form of effort -- is allowed either. Send a repair man and pay a few extra dollars to preserve the tax benefits.
- Not every IRA custodian offers real estate services. A bank only offers bank products, while a brokerage firm offers securities. If you are looking for a real estate IRA custodian, shop around. Ask your tax adviser for recommendations. Expect to pay higher annual fees for real estate IRA services, and be sure to read all notices. Custodians are responsible for reporting to the IRS. You are responsible for understanding and following all rules and regulations.