You are correct, however there is a way around the 10% early withdrawal penalty if you are under 59.5. If you need money out of your IRA prior to age 59.5 you can take a 72(t) election and distribute funds in substantial and equal distributions in order to avoid the 10% penalty.

I appreciate the feedback and I wholeheartedly agree that investors need to have options. However, investors need to be cautious and realize that if they act on incorrect information provided by their paid custodian there is a risk of potential negative tax consequences. Investors must do their own due diligence in order to work with a reputable company.

As for real estate and IRAs, I too have run across a number of sites touting various strategies. My question has less to do with CAN or CAN’T I buy real estate in my IRA, but WHY buy real estate in your IRA… Can anyone enlighten me?

As I see it, the real advantage of an IRA is tax deductibility and tax-free growth. And while the purchase of a rental property isn’t tax deductible, the income is tax-free if offset by depreciation, and I never pay capital gains if proceeds from the sale are used to buy a new property.

So other than a few thousand dollars in annual tax deductibility, what’s the advantage in buying real estate with an IRA? Wouldn’t an IRA be put to better use investing in assets which are more often subject to taxation?

While I agree it is always good advice for people to educate themselves about IRS rules, I am a nonetheless a little rankled by your post.

In my experience, more people are being harmed by incorrect information about what they CAN’T do with their IRAs than what they CAN. In particular, “advisors” who are really sales reps and the big mutual fund companies and brokerages touting “self-directed” IRAs that really aren’t are doing a lot more damage to more people’s financial well-being. These firms perpetuate the incorrect notion that “self-directed” means you can invest in “any public stock or fund WE offer.” This is denying people the right to truly diversify their retirement portfolios — something we now all know all too well is crucial.

It’s also not reasonable for people to expect their custodian to take on liability for investors’ decisions in the first place. Their job is to maintain custody of assets — not provide legal advice. As with any other tax decision — be it deductions, corporate formations, paying your nanny or utilizing IRA funds — American citizens are responsible for knowing the law themselves.

Many people today have the majority of their non-home assets tied up in retirement accounts, so being aware of what is possible and legal — and making sound choices — is absolutely key. I believe more people are being harmed by failing to pursue diversification and the best investment opportunities because they’ve accepted bad/biased information about what is not permitted than are making the kind of mistakes you describe.

Bottom line: we all have a stake in getting the RIGHT information out to everyone, to level the investing playing field. It shouldn’t be the case that only the most wealthy people with the best attorneys and CPAs can tap the benefits of diversification — or investing in real estate (or real estate related vehicles) at a time of unusual bargains.