Parents Retiring and I Want to Show Them Real Estate Investing

[Luke Salisbury]

Hello,

I am new to real estate investing. I have been listening to bigger pockets podcasts and have read a few books like Rich Dad Poor Dad, Tax Free Wealth, and The House Hacking Strategy. I thought of the idea of getting my parents to buy real estate in the area they want to retire in. My Dad is approaching 59.5 years old and is starting to decide how much longer he wants to work and what he wants to do with his money. Does anyone have experience with their parents retiring from long careers in the workforce then investing in real estate? I am looking for advice on how to point them to the right direction. 

[George Blower]

Originally posted by @Gary Parilis:

If your Dad has been in the workforce for many years, he probably has a sizable 401k. I'd recommend he investigate rolling 401k funds into a self-directed IRA. That allows him to invest in real estate with tax deferred funds. Potentially much better than taking distributions, which are taxed, to invest.

All of this assumes he wants to invest in real estate, as @Jacob Sampson says.

Of course, if you take a distribution from your retirement account you will have to pay the taxes and (likely) penalties.

There are possible alternatives which would allow to you use these funds without paying taxes or penalties.

• First, you may wish to consider transferring the funds to a self-directed 401k or IRA which will allow you to invest in real estate without incurring taxes or penalties. Please see additional considerations below.
• If you are eligible to set up a self-employed Solo 401k (or have a 401k plan through an employer which accepts rollover contributions and allows for 401k participant loans), another alternative which would avoid taxes and penalties would be to transfer your funds to such a 401k plan and then take a 401k participant loan. Please see additional considerations below.

Solo 401k vs. Self-directed IRA

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.

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).