How to Borrow Long-term From Your IRA Account
The Internal Revenue Service regulates what you can and cannot do in your Individual Retirement Account. A prohibited transaction is leveraging the IRA in any way, including borrowing from or using the IRA as collateral. Some investors use a 60-day rollover rule as a loophole to get short-term use of IRA funds. There are other options. A real estate IRA can be partnered with a limited liability company to obtain a mortgage. Employer-sponsored plans are permitted by the IRS to offer loans to participating employees. Situations vary, and borrowing may not always be feasible.
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Instructions
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Real Estate IRA Mortgage
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Transfer your IRA into a real estate IRA. The IRS permits real estate in IRAs, but your custodian has to be set up for property. Banks and brokerage firms rarely offer real estate IRA services. Ask a tax adviser, Realtor or bank representative for a recommendation. Once the money is in the account, you direct the IRA custodian as to what real estate asset to purchase.
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2
Open a limited liability company in the state you reside in. The purpose of the company is to buy, manage and sell real estate partnering with the real estate IRA account. Your real estate IRA custodian should have template documents to properly establish the partnership but get a qualified legal opinion if you have questions.
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Use the IRA as the cash down payment for the property. Only investment property is permitted in an IRA. You cannot live in, vacation at or personally work on the property.
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Obtain the mortgage via the LLC. The LLC hires the property management, collects income, pays debts and deals with taxes unrelated to the IRA percentage of the investment. If you put 10 percent down, only 10 percent of the property income is tax-deferred.
Rolling to Employer Plan
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Call your employer's retirement plan administrator at the number located on your statement. Ask whether the plan allows participant loans since not all plans offer it -- the IRS permits it but doesn't require it. If loans are allowed, ask if you are able to roll assets from an IRA into the plan -- once again this is plan specific and not mandated by the IRS.
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Obtain the paperwork to rollover the IRA into the employer plan if permitted and loans are allowed. Complete the paperwork and submit it to the plan administrator with a copy of your IRA statement.
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Wait for the assets to move into the plan before getting a loan application.
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Fill out the loan application. There is no credit check on employer plan loans since you are borrowing your own money. You can borrow up to $50,000 and cannot exceed 50 percent of your vested assets in the plan. You have five years to repay the loan, making interest and principal payments through paycheck deductions that go back into your plan.
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Tips & Warnings
Borrowing directly from your IRA is a prohibited transaction resulting in loss of IRA status. Taxes and penalties are applied to the fair market value of the IRA as of the start of the year when the loan was taken.
