Should I invest in rental properties with my 401K?

Question

Hello  I have a 401k worth 250000 and I am retiring from company> Im 55 years old and want to buy some rental properties for my 2 kids to rent from me.. I need the income from the rental properties now and was considering buying the rental properties instead of doing the stock market??  What are some of the tax issues I will run into and do I have to declare the rental income ?  Not sure what to do?

Dmitriy Fomichenko · Answer

@Kathleen Amundsen

you can rollover your 401k into self-directed IRA and buy rental properties with it. However, you can not rent those properties to your children since they are considered "disqualified persons". Consider becoming a private lender and using your IRA as a bank to lend money to others. You can get nice returns with relatively low risk.

There are no tax consequences for the rollover and all investment gains and income will be sheltered from taxes just like any other retirement account. You will pay taxes at the time of distribution.

Ryland Taniguchi · Answer

Questions To Ask Your CPA

1) How will real estate investing in your SDIRA affect your taxes related to RMD (Required Minimum Deposit) at age 70.5?

2) How will the RMD withdrawals affect your provisional income and how does it affect your Social Security Tax? (For example, married couples with over $34 k provisional income may have to pay 85% social security tax).

3) Are you better off doing something like a 72(t) to slowly move your SDIRA to your SD Roth IRA?

Jason Dillard · Answer

Good advice from the "holders" in this thread.  I buy about 5 houses a month so I want to maximize all the benefits of ownership as much as possible.  If you can't buy all your deals with SDRA and you want to lower your taxable income, then the way I do it may work best for you.

Carl Fischer · Answer

I also do "buy and hold" in Roth IRA. If you use leverage it is true you may have to pay UBIT however it is only on the portion you leverage and depreciation can be used in this case. Look at IRS Form 990T. Tax free income for life is great.  It removes a variable about wondering what tax you will pay.

You can not borrow funds from an IRA  but you may borrow from some 401(k) plans-$50k or half of your 401k balance whatever is less.

If you have income the IRS requires you to report it in most all cases. It is prohibited,in IRAs,  as stated by the BP posters,  to rent to your children as they are disqualified persons.

I would make sure I had the experience and/or education in real estate arena before I spent my 401k nest egg unless you can afford to lose it.

Look for education at your local REIA or on line classes. Watch and surround yourself with people who are doing what you want to do. Look to build a team that can fill in where you are lacking.  Take your time there'll always be more deals.  Be comfortable and knowledgeable about any deal you enter into  Good luck

Richard Dunlop · Answer

Sounds like a good strategy if you don't expect to make any profit!

Gautam Venkatesan · Answer

@Kathleen Amundsen

Another option could be to rollover your company 401K account (after retirement) to an IRA account and then you could borrow funds from your IRA to purchase property. You will have to payback the IRA loan using the rental income it is not free money.

Chris Martin · Answer

I have rentals in my SDIRA. Makes sense to me even w/o considering depreciation expense. Roughly $38K total basis (purchase plus eliminating deferred maintenance) rented for $700. Comps are about $50K+... I sold others, and the capital gains are not taxed and no depreciation recapture.

Don't do it to rent to your kids as others pointed out.

Where I am, most people don't buy rentals with SDIRA money. Most flip. Some speculate in land, some subdivide. I did an analysis of SDIRA investments my area and posted on BP... can't find the link at the moment.

Franklin Romine · Answer

@Kathleen Amundsen

Do you have other flows/sources of income besides the 250K 401K?

Frank

Jason Dillard · Answer

It hurts to leverage in a retirement account (ubit).  The tax shelter we all love called depreciation has no benefit inside the retirement account.

I think it's smart to lend, wholesale, and flip with your retirement accounts.  Hold property outside, so you can leverage and get the depreciation.

Mark Nolan · Answer

@Kathleen Amundsen

Visit the following link to learn more about disqualified persons with respect to solo 401k plans and IRAs.

http://www.irs.gov/Retirement-Plans/Retirement-Pla...

Also solo 401k plans are for the self-employed. You can learn more about self-employment requirements by visiting the following link.

http://www.irs.gov/Businesses/Small-Businesses-&-S...

Should I invest in rental properties with my 401K?

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