Investing with IRA's and 401(k)'s

[Brad Stoller]

I've run across a method that utilizes retirement funds to purchase wholesale foreclosures and REO's. Does anyone have any experience with this? I'd like to know your thoughts.

[Jon Holdman]

Sure, its not difficult to do with an IRA. 401ks are considerable more trouble.

With an IRA, you have to find a trustee/custodian who will let the IRA holder invest in real estate. Then you can buy real estate either for long term hold or short term.

There are some nasty taxes that apply to ordinary IRAs. They're called UBIT (unrelated business income tax) and apply to an active business like fix and flipping or wholesaling. These taxes are at the trust rates, which are 35% after $11,000 of income.

Rental income is exempt from UBIT. However, income from debt financed rentals are not.

Making loans from an IRA to a wholesaler or fix and flipper would not be subject to this tax.

Roth IRAs are supposedly exempt from UBIT, but I'm not certain about that.

401ks are hard to use because your employeer controls the allowed investments and real estate is rarely allowed.

Its possible to have your own company and create a Solo401k and put 401k money into it. Most employeers only allow you to take money out of the 401k and put it into a different one if you quit.