June 5, 2023

Using an IRA or 401(k) for Real Estate

Written By: Daniel Gleich

Key Points 

  • The more direct method for real estate investing with a retirement account is to open a Self-Directed IRA and roll over funds from an existing 401(k).

  • You can also consider opening a Checkbook IRA, which is a Self-Directed IRA that enables you to write checks and send wires without having to go through your IRA custodian for everyday transactions.

Retirement savings come in many different shapes, sizes and retirement accounts—especially when you bring real estate into the picture. If you’re looking to diversify your portfolio with real property, you might be wondering, “Can I buy real estate with my 401(k)?” or, “Can I use an IRA to buy real estate?” The answer is yes!

Hand holding a key to a real estate investment house, indicating that they bought real estate with an IRA.

Buying real estate through a retirement account can be a great way to invest beyond Wall Street, but how you go about it will depend on the type of retirement account you have. Here’s what you need to know about using an IRA or 401(k) to invest in real estate.

Can You Buy Real Estate with a 401(k)?

It’s possible to use a 401(k) for a real estate purchase, but not directly. You’ll first need to roll over your existing 401(k)’s funds into a new Self-Directed IRA. If your 401(k) is held with a former employer, you can complete the rollover by contacting your plan administrator and completing all necessary paperwork. If your 401(k) is held with your current employer you may not be able to roll the funds over to the new Self-Directed IRA. It is important to check with your current plan administrator if you can roll over your 401(k)’s funds in this case.

Can You Buy Real Estate with an IRA?

The streamlined way to buy real estate with a retirement account is to open a Self-Directed IRA. This unique account allows you to invest in all types of real estate, from residential to commercial to raw land and more. Just like in a standard IRA, your funds in a Self-Directed IRA can grow tax-deferred if it’s a Traditional IRA or tax-free if it’s a Roth IRA. Paired with the possible appreciation and potential cash flow of property, a Self-Directed IRA can be a powerful tool for real estate investing.

Coins stacked in an increasing trend with an investor adding to the highest stack and a replica of a house next to it, showing that the investor used a Self-Directed IRA for real estate investing.

If you have an existing 401(k), you can roll over some or all of your 401(k) funds to your newly opened Self-Directed IRA to fund the IRA. The rollover can be direct or indirect. A direct rollover is sent directly from your current plan to your Self-Directed IRA. An indirect rollover first distributes your retirement funds to you as the account holder. You will then have 60 days to deposit the funds into your new account to complete the rollover.

How to Use a Self-Directed IRA for Real Estate Investing

When you’re buying real estate with a Self-Directed IRA, you will instruct your Self-Directed IRA custodian, such as Madison Trust, to write a check or send a wire directly to your investment. Once you decide on a property you want to purchase, ask the realtor, seller and/or title company to list your IRA as the buyer on the contract and all other documentation. Under your direction, your custodian will sign all documentation and wire the earnest money deposit (EMD) to open escrow and ultimately complete the closing. Once your IRA owns the property, any related expenses will be paid with IRA funds. Any income will be held in the IRA until you wish to distribute funds or the asset itself.

What To Know When Using a Self-Directed IRA for Real Estate Infographic: 
(1) Titling Your Investment Property - Your IRA is the owner of the investment property, so the IRA must be listed as the buyer on all paperwork. (2) Treatment of Income: Expenses are paid through your Self-Directed IRA. Income generated by the investment flows into your Self-Directed IRA. Income and gains are sheltered from taxes until distributions are taken (UBIT may apply). (3) Benefits of a Checkbook IRA for Real Estate - Checkbook Control - Simply write a check or send a wire from your dedicated checking account designated for IRA transactions. Directed Access to Your Funds - Manage your transaction-heavy real estate investments, such as rental properties or fix-and-flips, on your time. Cost Effective - eliminate everyday transactions. Tax advantages - receive tax-deferred (Self-Directed Traditional IRA) or tax-free (Self-Directed Roth IRA) gains on your investment.

Upgrading to a Checkbook IRA for Checkbook Control

If you plan to invest in transaction-heavy rental properties or fix-and-flips, running every expense through your custodian can get cumbersome. Active real estate investors looking to build and manage real estate in their retirement portfolios often look to gain “checkbook control” by opening a Self-Directed Checkbook IRA. With checkbook control, you’re able to simply write checks and send wires yourself from a dedicated checking account designated for your IRA transactions. To get checkbook control, an LLC or trust needs to be established. When you open your Self-Directed IRA with Madison Trust, our sister company, Broad Financial, will help with forming your IRA LLC or IRA Trust. Learn more about Checkbook IRAs.

What is a Real Estate IRA?

If you see a retirement account called a Real Estate IRA, it’s simply a type of Self-Directed IRA that you can use to invest in real estate. A Real Estate IRA can be a classic Self-Directed IRA managed by a custodian like Madison Trust, or a Checkbook IRA. You can open a Real Estate IRA as either a Traditional or Roth IRA.

Choosing the Right Real Estate IRA Custodian

Whether you’re looking to open a Self-Directed IRA or Checkbook IRA for real estate investing, finding a reliable custodian can give you peace of mind in knowing your funds are secure and your questions will always be answered. With flat-rate fees, uncompromising client support, and over $4B of assets under custody, Madison Trust is a Self-Directed IRA custodian you can truly trust. See the Madison Advantage and set up a free discovery call today!

Self-Directed IRA investors being handed the key to their real estate investment.

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax, or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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