Experienced investors - I need your help~!

[Mary March]

Thanks for reading! My dilemma is whether it makes sense to use a self-directed IRA (check book control) for the following deal:

Purchase price $117,000

My current IRA (not yet rolled into a self directed account) if $30,000. I want to use this money for the down payment and finance the rest.

I thought this was a good idea at first, but I just read about how I would incur extra taxes on the financed part of the loan at an Estate Tax rate? Is that right? Does the loan need to be in the name of the IRA LLC? How does this all work?

Will the fees end up equaling the penalty if I just cash out my 401K and buy it directly? 

I am so confused - any help is appreciated.

Thanks,

Mary

[Brian Eastman]

@Mary March

If you were to setup an IRA with $30K, you would not have enough capital to qualify for a non-recourse loan in the name of the IRA to purchase a $117K property.

Non-recourse lenders typically want 30-40% down, 10-15% in reserves and they want to lend a minimum of about $50K to make it worth their while.

If you were to take a distribution you would pay federal and state income taxes on the $30K, which would be added to any income you have for the year and taxed at whatever bracket that results in.   There is also a 10% penalty for early distribution if you are under age 59 1/2.  Count on that $30K being reduced by 40-50%.  

Would you make an investment that guaranteed a 40% loss? Probably not. Leave the IRA alone.