Using Your IRA and 401(k) for Purchasing Property or Making Real Estate Investment

An Individual Retirement Account “IRA” is a special type of retirement plan, offered by several financial institutions, which allows tax advantages on the retirement amount savings. Basically, the IRA is an investment tool employed by individuals to make financial provisions for their retired life. There are many types of IRA plans – traditional IRA, Roth IRA, simple IRA, and sep IRA. The 401(k) plan is actually a plan based upon the regulation defined under subsection 401(k) of the Internal Revenue Taxation Code, according to which the retirement savings contributions offered by the employer are to be deducted from the employee’s paycheck before it is subjected to taxation. The employee ends up paying tax on the paycheck amount minus the monthly contribution towards the retirement fund. Both these plans offer tax advantages if one complies with the IRS regulations. Careful planning with these plans results in little or no tax ramifications. In certain cases, the retirement savings provisioned by the IRA and the 401(k) can be used to purchase your home or any other fixed asset(s). However, it is not always the case, and if you are planning to make such a purchase, it is important to know how you stand with the issue.

§  Consult your retirement plan administrator. Most IRA personnel do not allow or support real estate investment on your retirement savings, so it is important to determine whether you are eligible for the purchase. As per the law, 401(k) cannot always be used for real estate investment purposes.

§  Research and find how your loan regulations work. If you are not allowed to borrow against your IRA, chances are you can certainly do so against your 401(k) up to $50,000. Purchasing property with your 401(k) amount is advantageous since you are not required to pay any taxes. If you are eligible, it is advisable to contact a competent chartered account and work out how to go about the investment process.

§  Create a self-directed IRA provision. If your IRA custodian does not allow the investment, it is possible to open a new self-directed IRA account at an employment place that does permit such an investment.

§  Roll over your 401(k) account. If it is not possible to invest directly into real estate using your 401(k) proceeds, converting your 401(k) account into a tax free IRA account and subsequently use the proceeds through the IRA provision to save upon tax during the purchase is a possibility.

§  Supervise your cash flow. If you purchase property through your IRA account, all funds required to buy the property should come directly from the account, and vice versa if you receive any proceeds or profit from the invested property in the form of monthly rentals, the same should be returned back to your IRA account. Following these rules ensures you save upon the tax.

Generally, the retirement provision is very important and one should not take any chances while using the funds. It is one the main reason why the government is too stringent while utilizing the retirement funds before its maturity. However, at times individuals need to use the provision to arrange for the present needs. It is worth considering how you should go about it.

Source: PropertyCluster.com/blog via Rebecca