Invest in property with your IRA or 401(k)


Since I know a lot more about real estate than I do investing in stocks, I decided it was a great time to take advantage of the local housing market by using my Individual Retirement Account to invest in a rental home.

Currently inventory is high in Walla Walla County, with over 600 properties for sale. Interest rates are still at a record low, less than 4 percent for 30 year fixed mortgages and less than 3 percent for 15 year loans.

And sellers are eager to sell. According to the Walla Walla Multiple Listing Service, people who have sold their homes in the past two years have cut almost 4 percent on average off their original listed price.

According to the Washington Center for Real Estate Research, the median home price in Walla Walla County for 2003 was $130,000. In 2012 it’s $179,000, which is a 37 percent overall increase despite a fall-off in prices in the wake of the 2008 national housing mortgage crisis. And since that decline, local prices have been inching back up to the $193,000 median high of 2007.

Compared to the unpredictability in the financial markets and concerns the Fed is going to hold down savings and bond interest rates for a few more years, diversifying your retirement account with real estate has become a good hedge against the cyclical changes in the stock market, economy and bank and government-based investments.

“... (R)eal estate investments hold the potential to protect against the loss of principal while generating better than market-rate returns through income production and capital gains,” writes “Leverage Your IRA” author Matt Allen. And, he adds, both income and capital gains can flow back to IRAs as tax-deferred or tax-free, in the case of a Roth IRA.

If you have an IRA, all you have to do is roll it into a self-directed IRA. Employees who leave a company that sponsored a 401(k) plan can roll their money into a self-directed IRA, too.

A self-directed IRA allows the owner to move her own investments into just about anything “within” the IRA, not “cashed out.” For example, you can invest in real estate in any state or country, raw land, rental and commercial properties, condos, mobile homes, boat slips, machinery, livestock, start a new business, buy mortgage notes, loan money earning interest, tax liens and tax deeds, joint ventures, LLCs, mortgages, franchises, and more.

All of these have to be handled strictly as investments through a company that specializes in self-directed IRAs and cannot be used personally, which means that anything bought with your IRA is owned by your IRA, not by you personally. You also cannot loan money to or be in a transaction with a parent or child, but you can be with a sibling or other friend or relative.

There are only three items that the IRS prohibits owners of self-directed IRAs from investing in: collectibles (stamps, coins, art, antiques, gems, and metals), insurance contracts and investments in shares of an S corporation. IRS defines S corporations as those “that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes.

Congress created IRA arrangements in 1974 that allowed owners to self-direct “nontraditional” assets. In traditional IRAs, taxes are deferred until the money is taken out of the account at retirement.

In contrast, Roth IRAs, which were created in 1998, allow the owner to pay the taxes in the year the account is opened, then grow the account tax free for the life of the account as long as it has been open at least five years. In 2001, 401(k)s were created for self-employed individuals; Roth 401(k)s were added in 2006.

So when I took the plunge a year ago to use my IRA money in something other than the stock market, I chose an IRA custodian who allows real estate investing with an IRA. Then I moved some of my Roth IRA retirement money into a self-directed IRA, went house hunting and bought a house below market value that needed updates.

Location was a key factor in choosing the house. Buying the worst house on the block is still a wise move for investors. Buying when everyone else is resting for the winter is also a good move.

The house I bought had two bedrooms with one bathroom and a full, unfinished basement. I hired a contractor to create a basement with three bedrooms, another full bathroom and a utility room with kitchenette.

All the money that I used to buy and renovate the house came out of my self-directed IRA. Although I don’t pay federal taxes on the appreciation of the IRA through rental income or house value, I do pay taxes to the Washington Department of Revenue for rental income.

Using your self-directed IRA is a great way to take advantage of an appreciating local real estate market where rental rates are very high.

As always, the keys to success are to know the rules, consult with experts and take your time to understand and evaluate what you are doing.

Karen Yager is a Realtor with Adamas Realty in Walla Walla. She can be reached at or by calling 509-520-8623. Her website is at


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