Pension / Self Directed IRA question

9 Replies

My wife and I are thinking about moving to another state so we can invest in real estate more easily. We want to buy a duplex, live in one half and rent the other. In order to get a loan to do this (since I am self employed) we may need to go with a private lender as opposed to a conventional mortgage, so we would need a larger down payment. The money we will get from the sale of our house will cover most if not all of this money needed, but we were concerned with not having any other money to invest after purchasing the first duplex. My wife has a pension where she works and we were wondering if we could put that into a self directed IRA and use it to invest in real estate, and if so how would that work. Any info would be greatly appreciated. Thank you, Nick

@Nick Stango

Your wife's pension could be rolled over to a self directed IRA or Solo 401k to invest in real estate. Any such investing has to be done entirely at arm's length and purely for the benefit of the retirement plan, so you could not use this for your own property or to generate income for yourselves - other than taxable distributions from the IRA after age 59 1/2.

There is a lot of good information here on BP about the general concept of these plans.  The establishment and use of a self directed retirement plan can take many different forms depending on your situation and goals, so speaking with a professional in the field as well as your tax advisor is the best way to really learn about your options.

@Nick Stango

Thank you for the question.

You are using the word pension which can mean different things to different people. Is she working at the employer where she holds the pension? If so then you may not be able to use it. that will depend on her employer. If it is an old pension, you would need to find out if it is annuitized or "lump sum-able" (not a real word). Her employer will be able to answer those questions. If she can roll it to an IRA, then she could use it to invest in real estate.

It is probable that if she is still at her employer, she won't be able to use it.

Also if it is in her IRA, it will still be in her IRA, so unless she is 59.5yrs old, she would be penalized for taking money out to live on.

Does this answer your question?

@Brian Eastman and 

@Kirk Chisholm , Thank you for your advise, I have another question about this subject. Does a duplex that is both lived in by the owner and also rented out to a tenant get defined as a investment property, and if so does the income become divided if the property is purchased with a portion from the ira and a portion from private funding or personal cash? I other words if the property is purchased for 100k and 50k came from the ira and the rest is financed through a private lender or mortgage company, and say there is a $200 per month positive cash flow, does all of the cash flow need to go back into the ira? Thanks again.

This would depend on how the property is deeded/divided. Some Duplexes are considered one property (one home with a rental unit). It's taxed as a single building. In this case, if you and your wife are living on one side, your wife's IRA $ would not be able to be involved in the purchase. That would be self-dealing. If the property is divided, with each half of the duplex deeded as a separate property, like a condex, taxed separately, separate tax lots, etc, then your wife's IRA MAY be able to be involved in the purchase of that half of the building. All expenses for that half of the condex would come from her IRA, all income would flow to the IRA. However, there are many things to be aware of with this type of situation: If your wife's IRA owns the other half of the duplex, you will not be able to do any maintenance, nor use that part of the yard for your own personal use, and so forth. If there are any shared utilities or other items (example, a shared driveway, lawn, septic tank or well that needs maintenance, plowing or other upkeep), this creates another set of issues that could be perceived as self-dealing. To avoid prohibited transactions entirely, it's probably best to look for a completely separate rental property that you and your wife will not have any personal involvement in.

@Nick Stango

It seems that Doreen summed things up pretty well. The bottom line is that even with separate title on the units, such an arrangement would come with risk to the IRA.

Self directed IRA's are great tools for diversifying your retirement savings into real estate and being able to invest in what you know, but there are very strict guidelines to ensure that the entire focus of the activity is purely for the benefit of growing that tax-sheltered retirement savings.

@Nick Stango

If you decide not to use any part of the duplex for personal use and still do not have enough funds to purchase the duplex, you can also consider investing in the duplex using personal and IRA or solo 401k funds under a tenancy-in-common (TIC) purchase. This way you and your IRA or solo 401k would co-own the duplex. The rental income and expenses would be divided based on each owners percentage of ownership.

@Nick Stango

while it can be possible to pull your personal funds with the funds of an IRA in a joint investments under certain circumstances it is very easy to commit a prohibited transaction with this arrangement. I suggest keep things simple and look for alternative investment options.