Sometimes, self-directed investors using individual retirement accounts (IRAs) to invest in real estate find themselves in the position of not having quite enough cash. An IRA that is real-estate rich but cash-poor can create serious stress for an investor worried about unforeseen expenses or making minimum distributions.

Here is an example: You spend most of the money currently in your self-directed IRA to purchase a beachfront condo rental. A storm hits the area shortly thereafter, and the condo association calls for a special assessment. Your IRA simply does not have the money inside it to pay the assessment. You want to use your own money to pay for the assessment, but believe that would violate IRS rules about interacting with your IRA and possibly result in huge taxes, fines, and penalties.

What Can You Do?

Well, for starters, you can congratulate yourself for thinking about prohibited transactions, which are something that every self-directed investor needs at the forefront of their mind when making decisions about their IRA. Prohibited transactions are a stringent set of laws that say, in effect, that if your IRA interacts with a disqualified person, your account will be fully distributed. That means everything in the account is immediately taxable and everything that you do with the account after the prohibited transaction but before discovery of it by the IRS is also taxable. Avoiding these violations is a big deal.

You, your family members, and entities in which you have ownership are typically considered disqualified persons.

Thank You, Y2K

Fortunately for you and your condo investment, there is likely a solution for your cash-poor IRA. Let your mind drift back to 1999, when there was a really big scare about everyone’s computer simultaneously melting down when the date rolled from 1999 to 2000. This unfounded fear didn’t just affect the private sector. Our fearless government became concerned with it as well. In particular, overseers of retirement plans were worried that if the computers administering retirement plans fell victim to Y2K, a lot of retirees wouldn’t receive their retirement checks.

To deal with this potential problem, the government issued an exemption from the prohibited transaction rules. Under the exemption, for the time between November 1, 1999, and December 31, 2000, a disqualified person could loan money to their retirement plan under the following conditions:

(a) No interest or other fee was charged to the plan.

(b) The proceeds of the loan or extension of credit were used only for a purpose incidental to the ordinary operation of the plan which arises in connection with the plan’s inability to liquidate, or otherwise access its assets or access data as a result of a Y2K problem.

(c) The loan or extension of credit was unsecured.

(d) The loan or extension of credit was not directly or indirectly made by an employee benefit plan.

(e) The loan or extension of credit began on or after November 1, 1999 and was repaid or terminated no later than December 31, 2000.

In summary: You could make a zero-percent-interest loan to your retirement plan so long as the loan was unsecured, repaid by December 31, 2000, and used to pay for short term hiccups related to Y2K.

So how does this apply 17 years later? Well, remember this is a government program. When was the last time you’ve seen a government program stop? It does not happen often, and in this case, it has not happened yet. Due to various perceived crises since its inception, this handy exemption has stayed on the books and is now permanent. The current requirements to meet this exemption are quite similar to the earlier exemption. If you meet the requirements, you can make a loan to your IRA to pay for ordinary operating expenses or an incidental purpose so long as the loan is for zero percent interest, unsecured, and put in writing if the loan is going to exceed 60 days.

Does This Mean Life’s A Beach?

Now, let’s go back to the earlier example: The beach front condo in your IRA gets hit with an assessment you weren’t planning on and you don’t have enough cash in the IRA to pay the assessment. While you would certainly need to consult your lawyer or financial adviser, it is likely this situation would meet the terms of the exemption and you could make a zero-percent-interest loan to your IRA to cover the shortfall.

Worried about distributions? The same would likely apply in that case as well if your IRA is short on cash when you turn 70.5 and must start making withdrawals, also known as minimum distributions. You don’t necessarily have to worry about selling a property and/or making distributions in kind of the real estate in your IRA. All you need to do is loan your account the amount of the distribution. As with any investment decision, it is important to work with the appropriate professionals to make sure that your IRA is fully compliant with all existing IRS regulations before implementing a new strategy.

The examples in this article are extremely simple, and your specific account may have other factors in play that should affect your decision to leverage this strategy. The implications, however, are enormous and positive. If it is the right strategy for you, the option of making zero-percent loans to your IRA can dramatically expand your investing opportunities.

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  • Tim Berry

    Tim Berry is a self-directed IRA and 401(k) attorney who works with clients all over the United States and serves as legal counsel for Self-Directed Investor Society. He can be reached at

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