Financial adviser Sarah Brenner lays out the possible benefits and significant risks related to using IRA funds to buy real estate.
By Sarah Brenner
The real estate market is hot. It is a seller’s market in much of the country and buyers face challenges. They may need to move quickly or come up with cash fast to make a better offer. They may also need to show adequate resources to get financing. Realtors and mortgage brokers eager to close a deal may encourage buyers to tap any available resource to secure a dream property.
For many Americans, their IRA is their largest asset. It is not surprising, then, that they turn to their IRA as a quick source of cash in a real estate crunch. Why not borrow from the IRA instead of securing a bridge loan? Why not use the IRA as an immediate cash resource for a down payment and pay the IRA back later?
Advisers should urge caution. There are IRA rules that make things far more complicated than you might expect.
Some employer plans, like a 401(k), include provisions where participants can take loans. But IRAs are different. There are no loan provisions for IRAs. In fact, taking an actual loan from an IRA would be considered a prohibited transaction and could result in the IRS considering the entire IRA liquidated and the retirement savings lost.