For starters, all IRA investments must have a custodian or trustee that keeps track of the investments and reports any deposits or withdrawals to the IRS. In order to use your IRA to purchase real estate, you need to find an IRA administrator that permits real estate investments. Most major brokerage firms will not allow it, but there are a number of boutique firms that cater to real estate holdings.
If you choose to purchase real estate with your IRA, the real estate cannot be used for your personal benefit, nor can it be used for the benefit of a family member or business associate. Furthermore, you cannot personally guarantee a mortgage or loan, thus making the use of leverage virtually impossible.
If you want to pay cash for a piece of real estate and never plan to use it for your own benefit, it's not too difficult to buy the property inside an IRA. All you need to do is establish a self-directed IRA with a participating custodian, transfer some of your existing IRA to the new IRA and purchase the property.
There are some major drawbacks in using IRAs to fund real estate: Gains in the property will be taxed as ordinary income instead of capital gains; depreciation and other expenses cannot be deducted on your income tax return; it can be a headache when you reach age 70½ and are required to make minimum withdrawals.
Q: I am always interested in the advantages that a Roth IRA may provide. I have three children ages 5, 8 and 11. I am interested in knowing if there is a way to start a Roth IRA for them. Is there an age restriction (do they have to be 18)? Are there additional requirements, such as having earned income? If yes, how much earned income is necessary to open a Roth?
A: There is no age requirement for opening a Roth IRA, but the child must have wage or self-employment income. Money from mowing lawns or baby-sitting can be used for a Roth IRA as long as the child reports the income.
All of a child's income can be deposited into a Roth IRA up to the annual limit ($4,000 for 2006). Even if the child does not want to put the money into a Roth, there is no reason you can't put the money in. For example, if your kid earns $1,000 from washing neighbors' cars, he can spend the money on video games and you can put $1,000 into his Roth IRA.
Q: I am 76 and have lived in my condo for 29 years. It is worth $225,000. I've been offered that and more several times as it has a desirable location near the Connecticut River. Would I be eligible for a reverse mortgage? If so, how much would I receive a month from the bank? I own it free and clear.
A: You most certainly can get a reverse mortgage on your condo. Given your age and the value of your home, you could qualify for a monthly income of close to $1,000 or a lump sum of around $140,000.
Keep in mind that although you won't be responsible for paying off the loan as long as you live in your condo, the loan would need to be paid when you move or pass away. This could reduce the amount of inheritance your children receive.
Scott Hanson, a Certified Financial Planner, is a senior investment adviser with Hanson McClain, co-founder of Liberty Reverse Mortgage, and a registered principal with Securities America, member NASD/SIPC. Send your questions to Scott Hanson, Sacramento Bee Business, P.O. Box 15779, Sacramento, CA 95852 or e-mail to sacbiz@sacbee.com. Letters must include first and last name along with city of residence. All letters submitted become the property of The Bee. Back columns: www.sacbee.com/hanson.
