Self-Directed IRA - What happens when you turn 65?

[Rich Barrett]

My wife and I are 54yo, with IRAs holding traditional securities, and have previously dismissed the idea of using that money for real-estate investment for various reasons.

However, there is a piece of land that we’d like to buy and we could buy it cash using one of our IRAs. I’ve done some reading on how to proceed, and I’m clear on the basic rules. However, the information I’ve come across is all about the rules for purchasing and holding the real-estate. Nothing I’ve read deals with what you are allowed to do once you turn 65.

For example, in purchasing the land it would have to be an arms-length transaction. But what about when selling it? Could I sell it or gift it to my kids? The whole point of buying this land would be the ability to pass it on to our kids or perhaps even build on it and enjoy it after we turn 65.

Can someone point me to more information on this? The most recent BP podcast on this topic was woefully short on details. Thanks!

[John Underwood]

I beleive you can access self directed IRA money at 59 1/2.

You would have to move it out of the IRA to use it. No problem if it's in a ROTH.

You'd owe tax on appraised value (I assume) if it's in a Traditional self directed IRA.

[Bill Brandt]

To the best of my knowledge. 

You can’t sell to anyone in your direct family (parents Grand parents kids or grand kids). Around 65 you’re going to have to start taking RMDs. This means selling the property or taking it all out at one time. This is a downside to ira real estate. Less tax advantages, all regular income tax not capital gains, and usually 100% disposition. 

If you’re over 59 1/2 and want to keep the land you could consider taking it otu and paying the taxes sooner rather than later fi you want to enjoy the land or think it will be worth more in the future. It would be added to your taxable income which is bad, but your heirs as well would have a 100% withdrawal that would be added to their taxable income. 

Most of these problems go away if it’s a Roth. I don’t know if you could convert it to a Roth and pay the taxes that way over a few years. Talk to a tax/estate planning expert. 

[Dmitriy Fomichenko]

@Rich Barrett,

You can create a self-directed IRA and then perform a tax-free transfer to the new IRA from your existing one. Your IRA can then buy the land as an investment only. IRS rules prohibit you or any of your family members benefiting from IRA investments, so selling IRA-owned property to your child is off the table.

65 is not a magic number, once you turn 59 1/2 you can start taking distributions from your IRA penalty free, so regardless if you are 60, 65, or 70 the outcome would be the same - distribution will be taxable. The RMD (Required Minimum Distribution) will kick in at age 73 (not 65).

If you wish to use property personally you can take it out from the IRA as "in-kind distribution". After that you are free to do with it whatever you wish: build on it, sell it, gift to your child, etc.

[Rich Barrett]

@Dmitriy Fomichenko

Thanks! All the comments were helpful, but after I read yours I googled "in-kind distribution" and that's very helpful. I think that's essentially what we would want to do:

1. Purchase the land inside the SDIRA.
2. At 59 ½ or any point thereafter, withdraw the land from the SDIRA.
3. Pay income tax on the value of the land (I'm guessing we'd need an appraisal?).
4. Build on the land and enjoy it's use. 

Does that sound right?

[Bill Brandt]

Yup:  that’s what I meant when I said…

If you’re over 59 1/2 and want to keep the land you could consider taking it out and paying the taxes sooner rather than later if you want to enjoy the land or think it will be worth more in the future. It would be added to your taxable income which is bad, but your heirs as well would have a 100% withdrawal that would be added to their taxable income. 
  

If you haven’t purchased the land yet. The only reason you would use the SDIRA if this was your plan is that you have no other way to finance it. You’re literally creating a tax liability where there wouldn’t be one while losing current tax deductions. 

[Jeffrey Dixon]

Noting happens when you turn 65. At age 72, you have to start taking Required Minimum Distributions from the IRA. You can sell the property to a 3rd party, not yourself or other close family members. You could not gift it to your children. You could make the beneficiaries of the IRA and they would inherit the land when you pass. You could get an appraisal of the land and take that a lump sum distribution from the IRA and pay taxes on the amount distributed.

[Dmitriy Fomichenko]

@Rich Barrett,

Yes, your understanding is correct. Distribution is a taxable event and you would be required to establish the value (appraisal) of an asset you are distributing in kind.

[Joseph Palmiero]

Another strategy would be to setup a Solo 401k for a small business and roll over $100k from your IRA. Then you could borrow $50,000 from the plan tax free.

[Rich Barrett]

@Bill Brandt

Got it. I was a little slow on the uptake but now I understand. And that's a very good point about considering the tax liability but it sparks two more questions:

1. You said, "creating a tax liability where there wouldn't be one." But in fact I would have a tax liability when withdrawing funds from the IRA over time, the difference is that when I take it all out at once (in the form of land) versus incrementally over 20+ years, right?
2. You said, "while losing current tax deductions." Which current deductions would I lose out on?

Thanks so much for your patience and helping me understand this!

Rich

[Bill Brandt]

@Rich Barrett

Sorry Rich. I meant compared to investing in the same land with non-retirement funds. 

That’s why I said “If you haven’t purchased the land yet. The only reason you would use the SDIRA if this was your plan is that you have no other way to finance it.”

What I meant was if you are creating a tax liability in the increased land value that you wouldn’t have if you bought it with non-retirement funds. PLUS, you could deduct the interest with regular funds. PLUS, you would be allowed to work on it, use it, and even build a property for yourself on it, which you are not allowed to do if it’s in you’re retirement account. 

In my life real estate investing was an alternative to retirement funds. The upsides are: There’s no limit on how much you can save. It cash flows, usually tax free money. It doesn’t have to be sold at a certain time for RMDs. It’s 100% tax free when you die. What are the downsides? It’s a little harder? You have too much control? You have to buy a big bag to put all the money in? :-)

I just don’t see an advantage to retirement accounts over real estate unless you’re getting employer matches. Then you could invest that much for the 100% return. 

[Rich Barrett]

@Bill Brandt I agree, which is why we’ve avoided using SDIRA until now. We have a fair amount in IRAs from previous employment but I feel like using cash flow from current income is a more tax-advantaged way to invest in RE. 

This situation feels a little different because it's just land we want to hold and control for sentimental reasons. No income potential in the near term. My experience is that banks hate to lend in situations like that. Plus, I don't want to hamper future deals by increasing my DTI. So I'd like to buy the land cash and the only place I have that much personally available is in my IRA.

[Jeff Astor]

Sorry, I meant you can sell it to any non-disqualified person.