Dear Sue,
I read one of your articles where you talked about self-directed IRAs. You said that the IRAs could be used to invest in real estate.
Do you know if you are allowed to use your IRA money to pay down your own personal residence?
I was wondering because I heard that if the interest rate on my mortgage was 5 percent, paying it down would be just like earning 5 percent on my money.
The more I think about it, the more I like it. Where can you earn 5 percent?
The only available cash I have is in my IRA and I would like to use it to pay down my house.
Please get back to me.
~ Thrifty Thelma
Dear Thelma,
Paying down a loan with an interest rate of 5 percent is not exactly the same as earning 5 percent on your money.
To accurately calculate the yield, you would need to determine the “after tax” cost of your loan.
For example, after the mortgage interest and property tax deductions, the effective interest rate may be 4.2 percent.
Lets assume that you are currently receiving 2 percent on your investments. Your earnings would be increased by 2.2 percent.
For those of you who may be unaware, a self- directed IRA is when the account owner makes all of the investment decisions on behalf of his own retirement account.
Internal Revenue Service regulations require that either a trustee or custodian hold the IRA assets on behalf of the IRA owner.
I shared in a previous article that while there are many companies to choose from, I chose Pensco Trust, a company out of San Francisco.
I have bought and sold income property and have made loans secured by real property, all without capital gains tax.
The investments in a self-directed IRA are not limited to stocks, bonds and mutual funds.
The IRS permits an almost unlimited number of investment types. Those investments include real estate, mortgages, franchises, partnerships and private equity. You can even buy precious metals like gold and silver.
The IRS, however, will not permit any investment that is employed for personal use such as one’s personal residence.
Sorry Thelma, it’s a great idea. I too wish that we could direct our IRAs to make investments for our own personal use.
You can find a list of the prohibited investments in the Internal Revenue Code 4975 c 1.
Knowing the permitted investments in a self-directed IRA is a matter of good Home $$$s and Sense.
Sue Thompson is owner and sales manager of HomeTown Realtors in Auburn. She can be reached at
seesue@seehometown.com, or on the web at homedollarsandsense.com.
