Creative Financing for Self-Directed IRA

[Shane Edwards]

Hello,

I have heard of several ways to use my personal 401(k) for creative financing. I'm thinking of transferring my previous employer 401(k)(quit my W2 job last month) to a Self Directed IRA to use these funds to Fix and Flip or BRRRR a property, most likely SFH. I have roughly $115k in this account. Is this something I can accomplish? I'm weighing my options of just cashing out this account and just paying the taxes on it, but if possible I'd like to lend it to a project and take advantage of the tax free money. What could be some road blocks or hurdles? Could doing something like this be a waste of my time?

Would I consult an attorney or financial advisor to weigh my options?

Thanks in advance for your input!!

[Brian Eastman]

@Shane Edwards

A self-directed retirement plan is not a means for you to creatively use funds for your real estate deals.

As a retirement plan, the money is tax sheltered.  To maintain that tax-sheltered status, all investments made with the plan must be at arm's length, and may not create any transactions or benefit between you or what are referred to as disqualified parties (spouse, parents, children, family businesses, etc).

The purpose of a self-directed plan is diversification and control.  If you can better protect and grow your retirement savings placing the plan into investments such as rental properties or private lending, great.

The plan could purchase a property and execute a BRRRR, but your role is limited to being a "fund manager" and making sure the contracts are signed, vendors paid, etc. You cannot work on the project, mix IRA and personal funds, etc. The plan is the investor, not you. The loan would need to be non-recourse, which means no personal guarantee from you and also a lower LTV and some reserve requirements you might not see in a personally backed loan. BRRRR transactions are possible, but will be less aggressive than with personal funds. But, you get to use leverage within your IRA and have more control over the outcome than you would investing in equities or funds.

There are several specialty firms that offer self-directed IRA and Solo 401(k) plans active on BP. Do some reading and make some phone calls to get educated on what is possible.