Inherited IRA owning Real Estate
A client’s mom passed away 3 years ago with 400k in a traditional IRA that is invested in conventional mutual funds at a brokerage firm. The account is now titled as an Inherited IRA to my client who is 57 years old. He is extremely paranoid about having his assets subject to judgments and/or creditors and he is considering cashing out the IRA, paying all the tax, and then gifting the proceeds to his wife and/or children. He is also considering as an alternative, transferring the Inherited IRA to a Self-Directed IRA where he would then buy real estate with the IRA assets. His thinking is that the illiquid assets will make the IRA more judgment/creditor proof. He is a real estate investor who got burned by lawsuits in 2008 and doesn’t want to go through something like that again. Do you have any thoughts on the two options he is considering? If so, can you point me to some literature/articles that discussed the pros and cons of moving Inherited IRA assets to buy real estate? Thank you!!
Permalink Submitted by Jose Morales on Tue, 2015-06-02 15:34
I’m assuming that the mother passed away after her required beginning date? As a non-spouse beneficiary inherited IRA mandatory distributions would have had to begin the year after death using the beneficiary’s Single Life Expectency and then reducing the life expectancy factor from that year by 1 for each subsequent year. Taking the funds in the inherited IRA and putting them into an illiquid asset will make complying with the mandatory distribution requirements more difficult. Also, even when investing regular IRA funds in real estate you must keep a very significant portion of the overal IRA assets in some liquid investment to cover any expenses incurred as a result of holding real estate in the IRA. Things like routine maintenance and property management fees must be paid by the IRA, not the iRA owner or beneficiary. Holding the inherited IRA funds in illiquid assets will provide no creditor protection anyway in and of itself.