How To Buy Land With Your 401k or IRA

Spanish Peaks and Trinchera Peak from US 160 in southern Colorado. Photo Credit: David Herrera on Flickr.

If you’re like most people, you probably think the only thing you can buy with your 401k or IRA are stocks, bonds, ETFs, and mutual funds. It’s a walled garden stocked and carefully maintained by whoever your brokerage is (Schwab, Vanguard, Fidelity, etc.) Fortunately, that’s not the case. You can venture outside the walled garden and invest in things like real estate, including land. It’s one of personal finance’s best kept secrets: the self-directed retirement account (SDIRA).

Taking Control Of Your Retirement Funds

You can take any personal 401k or IRA and turn it into an SDIRA. In order to do so, you’ll need the help of a custodian. I personally use Advanta, but there’s plenty of custodians to choose from. BiggerPockets keeps a running list here. If you’re a member of your local real estate investors association (REIA), ask around as it’s likely folks there are already leveraging the power of an SDIRA.

Your custodian makes purchases for you in a standard SDIRA, but if you’re looking for more direct control, then ask your custodian about how to set up a “checkbook IRA/SDIRA.” In this scenario, your SDIRA controls a single member LLC with you as it’s designated manager. This LLC then operates just like any other business, taking care not to violate some of the key restrictions the IRS has for these self-directed accounts.

Be Mindful Of These Restrictions

It’s always a good idea to maintain regular communication with your custodian or CPA to ensure you don’t violate some of the rules surrounding SDIRAs.

A good rule of thumb is to treat your SDIRA like any traditional retirement account. Funds and assets are there to grow tax free over time for you to use in your later retirement. Your SDIRA cannot pay or directly benefit you, your spouse, heirs, immediate family members, or business(es) you own.

For the purposes of land, this means your SDIRA cannot buy parcels from your parents or spouse, sell them to your children, etc. Your business cannot buy a property and then transfer it to your SDIRA or vice-versa.

What you can and should do is use your SDIRA to buy and sell land from non-disqualified people and entities, and enjoy the tax benefits.

If you’re not sure about something, again, talk to your custodian or CPA. That’s what they’re there for.

Who A Self-Directed Account Is For…and Isn’t

If you’re someone who likes having direct control over where their money is going, are unhappy with the return you’re getting in the stock market, or simply don’t trust it, a SDIRA is something that will probably appeal to you.

I’m not an investment advisor or a CPA, so take my advice with the usual grain of salt. However, it’s my view you should only use an SDIRA to buy investments you understand. If you’re new to land, or real estate in general, you should try things out first on your own before going through the process of creating an SDIRA and committing any of your hard-earned retirement funds. Once you have some experience and are comfortable buying land, only then is it a good time to think about using an SDIRA.

Another Tool In Your Financial Toolbelt

Your SDIRA is yet another tool you have to diversify the way you save and invest. As I’ve said in previous articles, land is a great asset to buy and invest in alongside your traditional savings and investments. When it comes to retirement, the same idea applies, and I do practice what I preach. I have a Traditional IRA that is invested in the stock market with basic index funds. I have a self-directed Roth IRA that I use to buy and sell land. I haven’t abandoned the traditional retirement account and mutual funds, but I’m not 100% dependent on it either. I like having more than one option, and I suspect that’s going to be the case with most people who read this.

If you’ve had some experience with real estate or buying land, and it’s an investment you’re comfortable with, an SDIRA is something you should think about. Even if you’re on the fence about an SDIRA, you can always reach out to a custodian. They’re happy to answer your questions, and get you started once you’re ready.

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