Here's the big question that confuses many: Can you have real estate investments in your IRA or Keogh? YES. You can. So that was easy, now what?
The next question arises about leveraged real estate and how is it done. Yes. You can leverage real estate in a retirement vehicle, but it is so important to do it right, and all too often it isn't. So rather than go into the details of how it's been done wrong, let's just get it right.
Always Vest in the Name of the Trustee
IRA's have custodians or trustees, as do Keogh's and other qualified plans. Vesting must always be in the name of the custodian or trustee. IRA's never have individuals as custodians or trustees, unless an individual is properly certified under IRC 401 12(n) as a person who qualifies as a non-bank trustee. If you are one of those, you already know all this. If you are not, read on.
If you decide to buy property for the benefit of your account, and somehow the title or escrow company got your name on it rather than the trustee, that needs to be changed, even if it means starting the title/escrow work over. If you are the trustee of your qualified plan, the title must be in your name as trustee for the appropriate type of plan you have. If you are a co-trustee, yes, everyone has to be on title.
The Plan Must Make the Payments
Now back to leveraging. Your IRA or plan makes the payments. The payments are made from your account or plan, from whatever available cash there is to pay for the underlying debt. Remember that the property that you bought is the collateral for the loan your plan is paying for. So if title is vested properly, and I now am sure no one will make the improper vesting mistake, who makes the payment? The owner.
Yes, many times third parties make the payments, many of us have been there, but in this case it's serious. The plan has to make the payments. If that means making contributions, or selling other assets in the plan to make payments, so be it. If you don't, you're in default, and that means that the asset will be departing from your portfolio unless it's cured.
Should Your Retirement Plan Invest in Real Estate?
So that was easy. Now the part that becomes a little more interesting: Should you have real estate in your IRA, SEP-IRA, Keogh, or other qualified plan? The answer is yes, no, maybe so. OK, it's not a good answer as such, but let's examine the real situation.
If it's your IRA, it's your retirement. You should be a savvy real estate investor, or really know your way around real estate and notes. Also, remember your beneficiaries. Many times we have seen beneficiaries holding notes and property that the spouse had not necessarily paid real close attention to. In some cases the information left behind was not in the condition it should have been in to leave behind to anyone. Our suggestion and opinion is that real estate investments in an IRA should be made by professionals. If you fit in this category, in our experience has been great for many as part of a balanced portfolio or investment strategy.
Keogh's and Qualified Plans
Read IRA's directly above. If you are alone it's one thing, but when you affect the retirement and lives of others it becomes somewhat more complicated. If you are making decisions in a pool for your employees, the quality and type of deal you are making is significantly important. Your employees, (including spouses and children) will be impacted by the type of portfolio you put together. Usually a retirement portfolio is composed of stocks, bonds and money markets. If you use mutual funds, it works similarly, a stock fund, a bond fund and a money market fund. Within those classifications one can diversify. If you make the investment decisions, you need to be very careful about diversifying. If you want to include real estate, you certainly may, but balance it in terms of risk and proportion in your portfolio. Be certain that the investment is arms length, and well considered.
One thing that you should always consider is getting professional advice. This means all the advice, and be sure it's documented. Real estate can be an excellent component to a retirement plan, it just has to be done properly. If your plan allows self direction, meaning that you permit your employees to direct their own investments, then you need to make sure that they (and you) receive the proper information about investments and make that information constantly available. Information and education are key to reducing your liability over the long term also.
So can you have real estate in your IRA and Qualified Plan? Yes. But please follow the rules and get good advice, and it will pay back big dividends in more ways than one.