IRC SECTION 408 IRA Mutual FUNDs

8 Replies

Hello

Can someone help explain the process of using IRC Section 408 to buy investment property.

I have some money in my mutual fund with Vanguard that i want to use for a down payment on a rental.

any suggestion would be appreciated.

Thank You

@Phuong Dinh

The code section you refer to outlines Individual Retirement Arrangements, commonly referred to as IRA plans.

The code allows for a wide variety of investments including conventional financial products as well as real estate, privately held stocks, precious metals, etc.

Firms like Vanguard bundle plan administration services along with offering investments, and are generally limited to publicly traded stocks, funds, etc.

Specialty firms offer what are called self-directed IRA plans that can be invested more broadly. The business model and paperwork services of the firms are what differ, but the IRA tax treatment is the same.

With a self-directed IRA, you can diversify the investments to include things like real estate. All investments must be entirely by the IRA and for the benefit of the IRA. You cannot mix IRA and personal funds, use an IRA owned property personally, etc. The IRA is simply investing in real estate rather that investing in stocks.

Real estate may be purchased by an IRA using a mortgage. The mortgage must be non-recourse, meaning no personal guarantee from you. Such loans are available from a handful of institutions, who generally have higher down payment requirements and slightly higher interest rates since the property is the only security for the note. The use of debt financing in an IRA allows for the benefits of leverage, and can be a powerful tool. However, such leverage does create a small tax liability for the IRA based on the income that is attributed to the borrowed funds. The tax is known as UDFI.

The best way to learn more about these concepts is to read up here on BP and reach out to a few professionals in the field, many of whom are active in these forums.

My concern is if i use the Self Direct IRA to purchase real estate, do i have to pay tax penalty? @Brian Eastman

@Phuong Dinh ,

If you have a conventional IRA with mutual funds, you can sell those mutual funds and rollover into self-directed IRA to purchase real estate. This would be tax-free. 

@Phuong Dinh

There is no penalty when utilizing a self-directed IRA. It is still an IRA, it is just invested in different assets.

@Phuong Dinh  

See the following IRS page regarding how real estate can be held in an IRA.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-investments

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Thanks Everyone for the responses. All very good information.

Bless you all!

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