RETIREMENT FUNDS FOR RE INVESTMENTS

[David Jayne]

I was listening to a recent podcast, and the guest indicated he would advise liquidating IRA/401(k) acounts, transferring to a solo 401(k) and then investing in discounted real estate notes. He also advocated not making additional contributions to company 401(k) plans, regardless of their matching policy.

I realize there are some pretty horrible IRA/401(k) plans out there, but I think that is dangerous advice. If you liquidate a 401(k) before age 59 1/2, you incur taxes plus a 10% penalty. Adding that one-two punch together can easily equate to a 40%-50% reduction in your retirement account. If you're young and you don't have much in the fund, maybe it's not a big deal. But...if you're 50+ and retiring in a decade or less, you would have to significantly outperform your current investments to make it worthwhile (roughly double the rate of return). Not impossible, but a little too risky for my blood.

Also, if your employer provides matching contributions, that's an automatic 100% return! Tough to beat a doubling of your investment overnight. Even if the available investments suck, you could at least contribute enough to get the match. You could always take your funds and make a run for the RE border when you leave the company.

Anyways, I guess my point is, you can't make just broad-brushed recommendations. The best answer is likely dependent on the individual's circumstances.

[David Beard]

Doug plainly states that his note business consists almost entirely of buying and re-selling notes, so this is flipping inventory and subject to UBIT in an IRA, or subject to self-employment taxes and ordinary income treatment in a taxable account.

Lots of gurus also say that you can wholesale and flip in your IRA to grow you money exponentially inside the tax deferred plan. But doing lots of this also exposes your plan to UBIT, which is nasty little tax with pretty stiff rates, essentially negating much of the growth you were expecting.

As far as getting the company match on a 401k, with a 100% match, it would take 12 years for a non-401k with no match to overcome the 100% head start in the 401k, assuming 5% returns in the 401k and 12% in the non-401k. And given that most people don't spend more than 12 years with the same company these days anyway, it seems like a good idea to grab the 100% match while working there, but immediately roll it out to a self directed 401k/IRA after you depart. If your employer 401k has an optional brokerage window available beyond the standard fund menu, then all the better, as that makes available thousands of additional funds, ETFs, REITs, etc.