Self Directed IRA vs. Solo 401k vs. Cash Out vs. Leave it alone?

Question

PLEASE HELP!!!

I have a Roth IRA that has underperformed for years and I'm ready to be done with it. It did great in the last year so I'm looking to move it into something more productive. I heard a podcast on investing with a self directed IRA but the more I looked into it, it looked incredibly restrictive. I'm already retired military and have a pension and medical so I'm not overly worried about my real retirement and the Roth was mostly an afterthought. Now I want to increase my passive cashflow and want to do it through real estate. Bottom line is I want to use the funds in the IRA for a down payment on a multifamily in New Jersey where I'm moving next summer.

When I have mentioned this to investors they told me to stay away from Self Directed IRAs. I was told that solo 401ks are better. I'm a W2 wage earner currently so it's my understanding that I can't use a solo 401k right now. Because both of those are not good options then I could liquidate and pay the penalty or I could just leave it alone and come up with another strategy. All my wife and my free cash is going to pay off some home repairs on our current house to make it rentable when we leave so saving is not an option at this time.

I really want to cash out but I'm looking for any sane and logical reasons why I shouldn't. Thank you.

Josh

Odie Ayaga · Answer

@Joshua Hilliard in rereading your posts it sounds like you have two problems (an underperforming RothIRA and a multifamily you want to buy) that you're trying to solve with one solution (rolling the Roth into an SDIRA and using those funds for the multifamily). If that solution isn't practical then perhaps addressing the two problems individually is possible. There are other investments you can make with the SDIRA that may perform better than what you're getting now such as notes or, as I think others suggested, lending to others. There are fews associated with operating an SDIRA but those fees vary from custodian to custodian. That may at least provide an amenable solution for your underperforming Roth issue.

Odie Ayaga · Answer

Quick check @Justin Windham  because I thought I heard as much in Jeff Brown's podcast but don't recall: he's not able to roll a Roth into a Solo401k correct? I was going to suggest he do so in the previous post but recalled that I thought hearing that.

Justin Windham · Answer

@Joshua Hilliard

While there are prohibited transaction rules with IRAs that you might be referring to as "incredibly restrictive," a self-directed IRA would remove the investment class restrictions that may be resulting in poor performance with your Roth IRA. While a Solo 401k would be even better, a SDIRA might give you just flexibility you need to get access to better returns.

Account Closed · Answer

This won't answer that question exactly but will be some basic guidelines. There are new implications regarding the new Tax Law. Some of it has to do with income. Some has to do with your age. Some has to do with what you think the stock market will be doing between now and retirement.

if you are filing married joint return with a taxable income under $315,000 from all sources, then you are probably "ok" for fairly "simple" tax reporting and not a lot has changed except you will be paying a lot less in taxes. Yeah!!.  The filing single number is $157,500 taxable. As long as you are a trade or business (not just truly passive income) but if you are active in the trade or business, flipping, rentals, etc then you should be "ok".

If you decide to cash out, best practices would be to put the money into a separate bank account and draw on it as needed specifically for real estate investing. Also; borrowed money isn't taxed.

One of my partners has an old 403b and he no longer works for the company, so I am suggesting to him to cash out. His is invested in the stock market right now and at some point the market has to correct. Real estate has a long way to go up and can cash flow. In his situation, he is much better off investing in real estate for the long term.

A lot of the decision actually boils down to "do you want equity" or do you want "cash flow" and in what time period do you want it.

Joshua Hilliard · Answer

Thank you guys for the posts. I was told I don't qualify for a solo 401k so I guess that's a moot point. The restrictions I was talking about that unless I am using it to buy a property outright then it's hard to get a non recourse loan from a bank and I can't partner with the Roth IRA because that's not allowed. Then on top of that I'd have to do all the leg work on the property but I get none of the immediate benefits. And on top of everything else the company I was talking to charges a lot of fees for all transactions, holdings, and even cancellation. It just seems like a bad deal to me. Maybe some one can explain it better to me in a way that makes sense because right now I am just not getting it.

George Blower · Answer

@Joshua Hilliard

In order to participate in a solo 401k plan, part-time self-employment activity is required. IRS publication has a good section on this.

With respect to cashing out the Roth IRA, you will owe taxes on the gains but not the principal. However, if you are over age 59 1/2 and have had the Roth IRA for 5 years, than the gains would also be tax free. See the following for more on the Roth IRA distribution rules.

https://www.irs.gov/publications/p590b

Justin Windham · Answer

Excellent post, Odie. I agree completely.

George Blower · Answer

@Joshua Hilliard

I see. In that case, it sounds like you fall in peculiar situation if you don't have enough Roth IRA funds to process the purchased without incorporating a non-recourse loan.

Joshua Hilliard · Answer

Hi George,

I'm already receiving a nice pension so I'm not that overly concerned about the IRA at this point. I was in the market for another property and see this IRA drastically underperforming that just earned 20% this last year. I want out of the stock market. For some one that needs the Roth IRA I would understand keeping it. For me I'm just looking for performing assets and this thing is not cutting it right now. I just want it to work harder or I'm going to kill it. Looking for alternatives.

Dmitriy Fomichenko · Answer

@Joshua Hilliard,

PM me and I'll give you a contact.

Self Directed IRA vs. Solo 401k vs. Cash Out vs. Leave it alone?

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