Do Retirement Plans Offer Real Estate Asset Protection?
When investing in real estate using retirement accounts many wonder whether they need to form an LLC to buy the property, often as a form of asset protection. Most real estate investors understand the importance of legal structuring to protect themselves, particularly when investing with personal funds. But does the same logic apply when investing with retirement plans?
We’ll address this common question shortly, but first a bit of background. When purchasing real estate with retirement funds, the IRA owner has two options:
- The IRA can purchase the property directly and be listed on title as the owner.
- The IRA can “own” an LLC by being the sole member of the LLC. When a property is purchased, the LLC is the owner on title, NOT the IRA.
The question then becomes, would adding the additional layer of an LLC be a wise form of asset protection, or might this step be unnecessary?
The answer depends on two things: 1) What kind of retirement plan is involved; and 2) Which state the property is located in.
Solo 401(K)s: These plans are protected by Federal law and have strong asset protection. They are immune from lawsuit judgments and creditor judgments. However, they are subject to divorce settlements and partitions, the latter often referred to as Qualified Domestic Relations Orders, or QDROs, but otherwise offer excellent asset protection.
IRAs (Roth, SEP, Traditional) and HSAs: These plans are established by and subject to state law, and laws vary widely among the 50 states. Most states have specific laws regarding judgements against IRAs, but a few do not. As a general rule IRAs are well protected by state law. However, every state has unique laws you want to take into consideration before making a final decision. Below is a link for additional information to get you started on the rules for each state:
Finally, keep in mind that asset protection and risk mitigation strategies can vary wildly and are not solely a matter of regulation. Individual risk tolerance is often a consideration. When in doubt seek counsel with expertise in this specific area of the law.