David Moore opened by saying that when you look at whether you can do something with a retirement account, you typically look at two factors. He emphasized looking at what a person wants to buy and how that purchase relates to the account.
When Paying Off Property Debt Becomes a Problem
Tom Moore explained that one of the most common mistakes investors make is trying to use personal funds to pay down or eliminate debt on a property held inside a retirement plan. While it may seem like a simple fix, this action creates a direct benefit between you and your IRA or 401(k), and that’s exactly what the IRS defines as a prohibited transaction.
He summed it up by asking, “Is there a beneficial relationship?” If you or your personal finances are helping the retirement plan in any way, that relationship crosses the line.
Tom gave an example of someone using proceeds from the sale of a personal residence—or any personal savings—to pay off a loan tied to a retirement-owned property. Even though the intention might be good, that payment benefits the plan and triggers a prohibited transaction, effectively “blowing up” the account’s tax-advantaged status.
David Moore added that while IRAs can invest in nearly any asset type—except collectibles, life insurance contracts, or stock in an S corporation—investors must carefully separate personal and plan funds. The conversation in this case focused on a 401(k), which follows similar but not identical rules.
Key takeaways for Investors
- Do not use personal funds to pay off debt owned by an IRA or 401k. Doing so creates a prohibited transaction.
- Ask whether the transaction creates a beneficial relationship between you and the plan. If it does, it is a problem.
- IRAs can buy most things with the exceptions David Moore noted: collectibles, life insurance contracts, and stock in a sub S corporation.
- If you are unsure, treat the account as separate and avoid mixing personal funds with plan funds.
Both David Moore and Tom Moore stress that mixing personal and plan funds, even with good intentions, creates real risk. Keep retirement accounts separate so you do not risk losing tax protected status or triggering other consequences.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
