Using Parents Roth IRA for funding?

Question

Hello BP,

I have read a few forum posts about using SDIRA as a means of private lending. I still am not sure how to go about doing this, and what would be the up front costs to me or the lender (I.e. my parents) if done so properly. I would like to compete with all cash buyers but only have a 20% down payment saved for a BRRR strategy. Could I use my parents Roth IRA and give them 12% interest only with and refi/ pay them back through conventional bank financing around 6-12 months later? I would structure the deal at something like 20% down payment to them amortized at say 20 yrs.

Any thoughts or major details that I am missing? Should I speak to a tax attorney or someone similar?

Daniel Dietz · Answer

@Ben Unger, you are getting good advice about it being a prohibited transaction etc... above.

One *possible* solution IF your parents are old enough would be for them to take a (tax free) withdrawl from their ROTH and THEN loan that money to you. IF that could work, one of their concerns might be taxes since it is no longer in the ROTH. To that I would say if you are willing to pay them say 12% - taxes of 25%, they are STILL making a 9% return. Are they making that much in the ROTH? If not, a good deal, if yes, maybe not so much.

Dan Dietz

Brian Eastman · Answer

@Ben Unger

I wanted to confirm that what you propose would be a prohibited transaction.  Disqualified parties to an IRA include the account holder as well as their lineal family - parents, grandparents, children, grandchildren & spouses of descendants.  As such, your parent's IRA could not operate in a way that directly or indirectly benefits you.

IRA money can be a great way to fuel real estate deals.  @Jason Huffman 's recommendation to network and see if there are other parties in your circle of friends and families interested in putting IRA to work as a mortgage is a very common strategy.

If you have the deals, the money will follow.

Bernard Reisz · Answer

@Ben Unger To expand on @Daniel Dietz's suggestion, regardless of age, your parents may be able to withdraw their contributions, but not earnings, from the Roth IRA tax and penalty free. Those funds could then be loaned to you without any regulatory issues.

Ben Unger · Answer

Thanks Jason! That just makes things a little bit more difficult. I doubt my parents have sufficient funds just sitting in a general savings account...

Using Parents Roth IRA for funding?

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