Posted about 4 years ago

Have you been using your IRA to buy Real Estate? Be careful!

Some real estate investors use their IRA accounts to purchase real estate properties. According to CNBC’s article Top 10 reasons you should never borrow from your 401(k) plan, here are some reasons why you should never borrow from your retirement account. Granted these guys want you to do business the traditional way but you should be very aware of the pitfalls of these areas:

  • “You will be charged added interest and fees.” Most retirement plans charge an origination fee.
  • “Contributions could be suspended.” Many retirement plans will not allow contribution to the plan until the loan is paid off, which could take years. During this period, the advantage of reducing taxable income is lost.
  • “Failure to repay by the deadline will trigger a tax risk.” If the repayment is not met within the typical 5 year repayment plan, employers will treat the loan balance as a distribution; creating income taxes and possibly a 10% penalty for early withdraw, or could be forced out and prohibited from adding funds in the future.
  • “There’s additional risk if you quite or lose your job.” If you leave your place of employment, the 5 year repayment plan, drops to a 90 day repayment plan. If it is not met within the 90 days, the IRS will consider the unpaid balance to be taxable income.
  • “You’ll incur double taxation.” You will repay the loan with after-tax money, and then when the funds are withdrawn in retirement, you’ll pay taxes on that same money again.

Furthermore, starting January 1, 2015, a new rule will affect rollovers of individual retirement accounts. Only one 60-day rollover will be allowed within a 365 day period. Those who do not follow the new rule could end up with tax consequences after rolling over their IRAs. Those under 59 ½ years-old could receive a 10% early withdraw penalty in addition to the taxes owed.

In 2011, the IRS collected $5.7 billion in penalties for early withdrawal from retirement accounts, meaning that with the 10% penalty for withdrawing, $57 billion was withdrawn early from retirement accounts.

Additionally, with the IRA change coming in January 2015, it is important to expand your borrowing options and learn the best loan for you and your investments.