Real Estate IRA
L1: Real Estate IRAIf I move funds from my IRA to establish a Real Estate IRA, will I be able to do a 72T from it? I was told by a financial advisor that a 72T can be established from any form of IRA but my personal research has not yielded any info regarding 72T and REIRAs. In fact, from what I am able to find via Google indicates that I can’t benefit at present at all from the REIRA and any rent collected from the purchased properties will have to go back into the REIRA and I can’t draw from it for personal use without causing a prohibited transaction. Please help.2011-01-14 02:13, By: Snookie, IP: [188.8.131.52]
L2: Real Estate IRAThere is no technical reason why you cannot initiate a 72t plan from any IRA holding allowed investments.
However, a RE IRA itself can be a major can of worms for several reasons, and when you must take annual distributions, whether they are RMDs or 72t payments, you are just putting more pressure on the liquidity of your IRA. Accordingly, use of RE in 72t accounts is justifiably quite rare.
To put this in perspective, if you make a prohibited transaction which RE holding are prone to, your entire IRA is considered distributed. Considering that this would result in a massive tax bill, having to pay the 10% penalty is just adding insult to injury since a busted 72t results in penalties back to the first year of the plan.
I guess you could describe this as a bucket of worms transformed into a bucket and a half of worms when you add a 72t plan to a RE driven IRA. Yes, it can be done and you CAN take distributions, but one wrong move would be disastrous.
You might discuss this idea with a large professional self directed IRA custodian like Pensco or Guidant, and make sure they understand that you will need to withdraw 4-5% of your IRA value each year for the number of years your 72t plan must run. If you start the plan in your early 50s, you might be stretching for liquidity after 7 or 8 years. It might be interesting to see what they say, but be sure they understand a 72t plan as well as how to avoid the pitfalls.
2011-01-14 03:10, By: Alan S., IP: [184.108.40.206]
L3: Real Estate IRAThank you for your prompt reply. This is all too complicated for me. I’ll take the penalty and be free to do what I want with my properties. I would have thought that a 72T disbursement would have been free of any further possible prohibitions. The rent monies would go to the RE IRA as it should and the 72T would be mine to spend as I pleased. Sounded simple but now I’m afraid to bother with a RE IRA.2011-01-14 03:46, By: Snookie, IP: [220.127.116.11]
L4: Real Estate IRAYou probably need to determine which is more important to you, the 72t or the RE investments in your IRA. If you don’t have the RE in the IRA yet, you could complete your 72t plan using traditional investments, and when it is over you could then make the RE purchases if you wish.
Again, there are no regulations forbidding what you want to do, it is just a very difficult combination to handle with all kinds of challenges.2011-01-14 18:34, By: Alan S., IP: [18.104.22.168]
L5: Real Estate IRAMy understanding is that you cannot have any involvement or relationship with the properties being rented. If you do, this is a “prohibited transaction”, with massive tax problems of taxation, penalties, and interest.
Also, look at my other postings on why RE in an IRA is not an approach that I would ever recommend.
However, if you wanted to invest in R E public partnerships, REITs, etc. you would remove the “prohibited transaction” element out of the consideration. Then it becomes the rationale of losing all of the tax deductions that rentals have, and paying tax on all of the withdrawals at ordinary tax rates of usually 25%-35%, vs. paying capital gains tax rates of15%, or even -0- for lower tax bracket taxayers.2011-01-14 21:30, By: dlzallestaxes, IP: [22.214.171.124]