Any insight on using an IRA or a 401k to invest in real estate?

Question

Dmitriy Fomichenko · Answer

Just to be technically correct... there is no such thing as Solo-IRA.

There is a self-directed IRA, and self-directed Solo 401k. While there are similarities, these are two quite different retirement plans. While an IRA requires a custodian, Solo 401k does not.

IRA is individual retirement account and anyone can have one. Solo 401k is Employer Sponsored plan and requires to have a legitimate self-employment activity or small business w/o full time employees. Max contributions are as follow: IRA $6,500/yr, Solo 401k $60,000/yr. Just some of the differences...

Dmitriy Fomichenko · Answer

Elliot, just to provide some further clarification on Carl's comments about regarding qualification for a Solo 401k plan. Just having a company (such as an LLC) is not enough, you have to have a legitimate business that you run using the LLC. LLC by itself is just a shell, it can be used to run an active business or it can be holding entity used to hold rentals. So if there is not active business inside of the LLC or if the LLC just holds rentals - that is not sufficient to establish a Solo 401k plan.

Carl Fischer · Answer

@Elliot Jones

Self Directed IRA's or Solo 401(k)'s are a great vehicle to diversify your investment portfolio. Many people find this to be safer, because they are in control of their investment. They choose it and do all the research into the investment. I have seen many friends, family and colleagues who have been very successful using a SDIRA to invest in a piece of real estate.

Some things to note, you or anyone linear to you (parents, spouse, children and grandchildren) can not live in or stay at the property or do any maintenance to the property. Second, Do you plan to hold the real estate in your IRA, or do you plan to fix it up and sell it again (flip)? Depending on what you plan to do with the property(ies) will help determine if an SDIRA or a Solo 401(k) would be better.

In order to have a Solo401(k) you will need to own a company and have no employees.

If you have any questions, I would be glad to help.

Thank you

Carl

Ken P. · Answer

If you are an accredited investor, you can use a self-directed IRA to invest in syndications, often used for large commercial projects like buying apartment buildings.   Typically you have to have at least $50,000 in the IRA to invest in a syndication.

Jay Hinrichs · Answer

the set up is pretty standard stuff any of the pro's on BP can help with that...

one thing I have seen and I have done a LOT of financing for IRA buyers... is if they are going to buy rentals .. they need to have adequate reserves.. and probably more than adequate.. as you can't add your own personal funds if you have a messy tenant and have a big turn over bill and you do't have enough money in your account... it can lead to real issues... so just go into it well capitalized and if your buying rentals don't use your last dollar in your account always keep 20k or so liquid for the unknown that may occur

David Klein · Answer

Maybe you are talking about getting a loan from your account, or taking a distribution.  Both of these are possible, but they have financial ramifications.  Tax, fees, loss of interest income.  It might make sense, or it might not.  Check with your administrator to see how it works in your specific case.

Richard Wormwood · Answer

That's exactly why you need to consult with a professional.Thanks for the clarification @Dmitriy Fomichenko

Richard Wormwood · Answer

What you are referring is a Solo-401k or Solo-IRA.There are a number of companies that can set up and administer your account. Some charge a nominal fee upfront and some charge an annual fee.Once the account is created, you can roll any existing 401k/IRA into the account. You'll want to consult your current administrator to maximize the amount you roll over as well as mitigate any tax obligation.You'll then be limited to $53,000 in contributions per year or $59,000 if you're over 50 years of age.But that is outside contributions...As a Solo 401k/IRA you'll be able to invest the entirety of the account into anything you choose (with limitations depending on who manages your account). Some management companies will have to approve your investments, some do not.

After you have purchased the property and sold it, all profits are then directed back into the account to rinse and repeat.

By the letter of the law, every dime made on the property must go back into the investment account with nothing actually ending up in your pocket, but there are ways around this. You are, after all, providing a service in your efforts and can effectively charge a fee for your services under the declaration of a contractor in the form of a Corp or LLC.

It gets very convoluted and if not done right, is illegal. Consult a lawyer and CPA for further details on how to do this.

Any insight on using an IRA or a 401k to invest in real estate?

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