Hey everyone! I am a real estate investor and am wanting to continue adding to my portfolio but due to needing 15% down, I am needing to find some creative ways to come up with a down payment. Which leads me to my next question. How to use retirement funds to invest in Real Estate and is it a good idea?
A self-directed IRA or 401(k) plan can be configured to allow your retirement plan to invest in real estate. Keep in mind, this is not expanding your portfolio, or a way for you to personally access the funds in the retirement plan. The tax-sheltered IRA is simply investing in real estate rather than in say, stocks. All purchases must be funded from the retirement plan, all expenses of operation paid by the plan and all income returns to the plan tax-sheltered.
Lots of good information here on BP on the topic. What really matters is your specific situation and goals, so doing a quick overview then reaching out to a few providers is the better way to go. Don't spend 20 hours chasing down the rabbit hole of the internet.
A self-directed IRA or 401(k) plan can be configured to allow your retirement plan to invest in real estate. Keep in mind, this is not expanding your portfolio, or a way for you to personally access the funds in the retirement plan. The tax-sheltered IRA is simply investing in real estate rather than in say, stocks. All purchases must be funded from the retirement plan, all expenses of operation paid by the plan and all income returns to the plan tax-sheltered.
Lots of good information here on BP on the topic. What really matters is your specific situation and goals, so doing a quick overview then reaching out to a few providers is the better way to go. Don't spend 20 hours chasing down the rabbit hole of the internet.
If you are self-employed with no full-time w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.
Solo 401k vs. Self-directed IRA
A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:
Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax
General Considerations Re Investing Retirement Funds in Real Estate:
1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).
2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.
3. In either case, all of the income and expenses will need to flow in and out of the retirement account.
4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.
5. In either case, you can't live on the property or otherwise use it for personal use.
6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).
7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).
8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Jordan Archer there are tons of self-directed IRA and 401(k) administrators. We've worked with dozens of them over the years with our investors. We have a few we really like. As others have mentioned there's a lot of info on BP about this topic. Feel free to message me if you would like recommendations. And we obviously do not get paid to recommend these firms.
Another recommendation would be to speak to a tax strategist who can help you understand UBIT and UDFI tax rules.