Can you use a Self Directes IRA to jump start R.E. Investing?

[Kadeen E Lyons]

I have been suffering from analysis paralysis when it comes to real estate investing for a couple of years now. So now I just want to get the momentum going. Capital has always been a big hurdle for me but I do have about 20k saved up in a 401k and i wanted to see if anyone has done a self directed IRA to invest and what their thoughts and experience with it? Also, what companies do you recommend?

[George Blower]

@Kadeen E Lyons

1) First, you can't take a loan from an IRA but may be able to take a loan from your 401k - either traditional or under the CARES Act (check with the administrator).

2) Here are the general considerations regarding 401k loans.

401k Participant Loans

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Please keep in mind the multiple loan rules:

Under those rules, the sum of the balances of a participant's outstanding 401k loans under a single 401k plan (using the highest outstanding balance of each loan over the last 12 months) can't exceed 50% or $50,000 whichever is less. Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.

3) Keep in mind that in order to take a distribution or loan under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution or loan. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.

Distributions:

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Loans:

Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.

Here are the details regarding the loans:

NEW LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

• • Individual who is diagnosed with COVID-19, with a CDC-approved test;
  • Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
  • Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:

• Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000. Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
• Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
• Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
• Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
• First Payment:
  • For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
  • For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).

EXISTING LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

• • Individual who is diagnosed with COVID-19, with a CDC-approved test;
  • Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
  • Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

If you meet the above conditions:

• You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
• You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
• If you elect to delay making such loan payments, the term of your loan will be appropriately extended. For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.