Can You Retire in a Home Purchased With Your IRA?
By Alisha Bennett
The short answer is yes. However, as with most retirement strategies, there is a little more involved.
The basic scenario is that the IRA buys the home as an investment and treats it as such UNTIL you reach 59 1/2 (retire); in which case the home is treated as a distribution from the IRA. Once the property is distributed you can use it personally; it’s no different in this aspect than a distribution of cash which you are then able to use personally.
However, before you go invest in your dream retirement home keep in the mind the following tips:
Avoid Prohibited Transactions on Your Investment
Distribute the Property Completely and Properly Before Using Personally
Be Aware of the Tax Implications
Check Your Cashflow
Avoiding Prohibited Transactions
Short from familiarizing yourself with every last jot of IRC Section 4975 regarding prohibited transaction rules regarding IRA investments; your next best option is to keep it simple. Any personal use or benefit of the investment while under the IRA ownership is not allowed. The property must be used for investment purposes only; unrelated third-party transactions are allowable. However, any use by the IRA owner (including family members) is prohibited. So allowing your stepson and his family to rent your retirement home is a prohibited transaction.
Distribute the Property Completely and Properly
Make sure that your property has been properly been distributed in full before using it personally. A distribution of property is known as an in-kind distribution. An appraisal of the property will be required by the Custodian before a distribution is allowed. Using the Fair Market Value of the property; the value of the distribution will be set. Because this will result in a taxable situation some owners distribute a property in stages; which will not allow personal use of the property until the final distribution has been made. This may prove a hindrance to your plan to occupy the home in a short time-frame.
Be Aware of Tax Implications
As discussed above, a distribution of property will result in taxes due. To avoid this, some owners will distribute a property gradually over the course of a few years to alleviate their tax burden. While this may prove a worthwhile strategy, it does require annual appraisals to determine the Fair Market Value. Of course, if you have a ROTH IRA, the distribution of the property will not be taxable if it meets the correct qualifications. Either way, you should be aware of your potential tax burden each year and consult with your accountant.
Check Your Cashflow
Once your retirement home is fully distributed and available for personal use, keep in mind that you will no longer be able to use IRA funds (unless distributed) for its maintenance, property taxes, utilities, etc. With careful planning, this may not be an issue but it is certainly worth considering, especially if your current home is low on those kinds of costs.
Stepson? I thought stepkids were OK, as the IRS only prohibits lineal descendants.
Hi Dave,
Step children technically aren’t considered disqualified persons. The only caveat is that the IRS takes the position that if a fiduciary engages in a transaction with someone that may affect the exercise of the fiduciary’s best judgement as a fiduciary, then that is a prohibited transaction. The Congressional report on ERISA said that only applied to the Dept. of Labor prohibited transaction rules, not the IRS rules, so that is the only issue.
Alisha was just being conservative here in saying you shouldn’t rent the house to a step-child. Not to say you couldn’t do it, but just because the step-child isn’t a disqualified person doesn’t mean that any deal with them would fly; there’s another set of questions to answer per what I said above.
Thanks for the question.
Can the property be distributed over multiple years, and if so, how many? At what age must I start taking a distribution? If this is a foreign property, how is exchange rate calculated on the value?
Hey Alex,
Yes you can distribute the property over multiple years to spread out the tax liability; there is no limit to how many years you choose. With your Solo 401(k), you’d have to start taking minimum distributions at age 70 1/2. On foreign property, you’d have to get some sort of appraisal and if the appraisal is made in a local currency, then you can use the links on the IRS’s Foreign Currency and Currency Exchange Rates page. The best one in my opinion is the US Treasury’s exchange rate report, which you can find here.
If you’re thinking of pulling property out of the plan, there’s another more creative way to do it. Give me a call if you’d like to discuss the other option.