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Real Estate and Retirement Plans

Why You Should Rely on Yourself and Not the Government

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Most Americans are now concerned that company pension plans and Social Security will not adequately provide for them in their retirement years. Their concerns are warranted.

According to an article on, “Social Security benefits will start to exceed the program’s costs in 2020, and the program will deplete its $2.9 trillion reserve fund in 2035.

The reserves will run out a little later than the trustees of Social Security and Medicare predicted last year, but the bottom line is still the same. The program’s deficits appear vast, making it clear that the public should expect smaller benefits, higher taxes, or both.”

Over the last 40 years, Congress has approved increasingly beneficial retirement options designed to encourage Americans to save on their own for their golden years. While no Congressman will dare utter the fact that with mind-numbing trillions and trillions of unfunded obligations, Social Security and Medicare are now regarded by many as Ponzi schemes that can never be fixed, Congress has covered itself with retirement legislation. So that twenty years or so from now when the government system inevitably breaks, Congress, the institution, will be able to shake its finger at the American people and point to the IRAs, 401(k)s, Roth IRAs and the like they have created. And the message will be that the benevolent Congress gave the masses a way to save for their own retirement years ago. What will not be addressed is why the government continued to take 15.3% in payroll taxes from workers and businesses for a failed system. But that’s an issue between you and the ballot box.

The point is that to provide for your own retirement, it is prudent, as it is in all facets of life, to rely on yourself and not on the government.

When it comes to planning for the future, some real estate investors use their real estate portfolio to provide for retirement.

We have many clients using this strategy. As an example, Denny is a dentist who owns a 40 unit apartment building financed on a 15 year note. While his mortgage payments are higher for now he will own the building free and clear upon his retirement. Denny will receive $12,000 a month or more once the mortgage is paid off. Better yet, because of depreciation and the suspension of losses until real estate gains are offset and realized, Denny’s $12,000 a month profit will be tax free for a good many years. That monthly income will cover his needs throughout his retirement.

Which Retirement Plans Can Invest In Real Estate?

Retirement plans such as IRAs, Keoghs, SEPs and Roth IRAs are not subject to the same limitations as ERISA [Employment Retirement Income Security Act of 1974] plans. These more restrictive plans include 401(k)’s and many corporate defined benefit pension plans.

ERISA plans, such as the popular 401(k)s, cannot invest in real estate, but IRAs can. IRAs may also be self-directed, meaning that you can retain an independent trust company to serve as IRA trustee and direct them where to invest your retirement monies.

What Can’t IRAs Invest In?

IRAs cannot invest in S corporations, life insurance or collectibles (such as paintings, antiques, gems, coins and oriental rugs). Almost all other investments are fair game so, for example, you can invest in real estate, bonds, trust deeds, notes, annuities and limited partnerships.

What Type Of Real Estate Is An Acceptable IRA Investment?

Your plan can invest in raw land, subdivided or improved land, single family homes, apartment buildings, multi-unit homes, co-ops and commercial property. If your plan purchased real estate for cash (no loan) from an unrelated party and you never use the property for personal reasons (nor do certain family members), then the investment is rather simple.

Can An IRA Use Debt To Acquire Real Estate?

Yes, but there are several restrictions.

First, the loan must be non-recourse, meaning that the lender may only look to the IRA-owned property as security for the loan. If the loan isn’t paid back, the lender can only proceed against the property. They have no recourse, or right, to proceed against any other assets, meaning your other retirement monies.

Which is good for you, the borrower, but is also a reason why not many lenders make non-recourse loans. They want as much security as possible. (You would, too.) So then how do you obtain financing?

There are several ways. You can have the seller carry back a note. Seller financing is a good way to proceed. You can also have a friend make the loan using their own funds or IRA funds. Remember that if you fail to make the payments your ‘friend’ can end up with the property. Finally, if you put enough money down (say 50% or more) some banks may make a non-recourse loan. With a large down payment some lenders will feel comfortable in having only the property as security.

Another restriction is that you, as the plan beneficiary, cannot personally guarantee or even sign for the loan. As such, the plan and your plan trustee must sign the loan papers. Not all trustees are going to do this, so check ahead of time what your trustee is willing to do to assist in the securing of financing.

To learn more about how to use real estate for a retirement plan, read my book, Loopholes of Real Estate.

Original publish date: August 07, 2019

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