Tax implications - Using IRA and/or SEP for funding REI

[Mary P.]

Thanks in advance for answering this for me:

If we take money from our IRA or SEP to fund an investment property, what kind of tax implications would that have?

The IRA is actually a beneficiary IRA and the SEP is pre tax cash from our personal income (we are both self employed).

[Brian Eastman]

@Mary P.

Are you wanting to have the IRA money invest in and receive the benefit from the real estate, or are you looking to distribute the IRA to yourself and then have personal money to invest in real estate.

An IRA can diversify and invest into real estate. In your case, a Solo 401(k) may be a good option that would allow you and your husband through your self-employment to setup a plan that has great tax savings potential like the SEP and can be easily self-directed into real estate. There are no tax implications of moving the IRA from investments in financial products to investments in real estate.

If you want to take the money out of the IRA to use for a personal real estate investment, then the amounts you distribute would be taxable to you at your marginal rate, with an additional 10% penalty for early distribution if you are under age 59 1/2.

As for the inherited IRA, that is a different story. You likely cannot consolidate that to the SEP or Solo 401k route you could for your directly held funds. A separate self-directed IRA could be setup for those funds or you may choose to distribute to yourself from that account without any penalties - just the taxes. Taking a big sum at once will hurt on taxes, but if you parse it out over a few year period it can be manageable.