QUESTION: Hello, I have very recently been severed from my company and must do something with my existing 401K. I own 2 rental properties here in my town and my 401k could easily pay off the largest one…. I’m curious about the costs of setting up a self-directed real estate IRA and paying off the rental, in turn that would make my retirement a monthly profit. What would be the costs and process to do something like that?
ANSWER: While the retirement account transfer rules allow for the transfer of former employer 401k funds to a self-directed IRA for investing in alternative investments such as real estate, it is prohibited to open a self-directed IRA and use the funds to invest in or purchase rental properties that the IRA owner/participant already owns. This particular prohibited transaction would fall under the following prohibited transaction categories:
(c) Prohibited transaction
(1) General rule
For purposes of this section, the term “prohibited transaction” means any direct or indirect—
(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
Essentially, in order to comply with IRC 4975c prohibited transaction rules, the IRA owner cannot benefit personally as a result of a his or her IRAs investment, which would be the case in this particular situation if you used the IRA funds to pay the off the rental properties.
Lastly, click here for self-directed IRA pricing.
Ryan in San Diego, CA