Self Directed IRA or Other regarding 401k

[Marcus Robert]

Greetings: I'd like some input on using my 401(k) to purchase Rental Properties via a self-directed IRA. I understand that you need a custodian, I understand that you can only transfer the 401(k) once you have stopped working for the employer, and I understand that once you're 55 years old, you can start accessing your 401(k) so here are my questions…

1.) At 55, if I no longer work for my employer and transfer my 401(k) funds, when will I start to be able to take advantage of receiving cash flow from these properties or does the cash flow have to stay in the self-directed IRA?

2.) looking for advice on how to deploy 600+ thousand dollars into real estate and start receiving the cash flow from it without having to pull the 401(k) out and swallow the tax ramifications.

I currently own 13 units and receive healthy cash flow from all of them, but I am looking to increase my cash flow so I can ease into the next phase of my life which includes work of a different kind but not doesn’t having a 9 to 5 job.

Thanks in advance!

Marcus

[Greg Scott]

The truth about an IRA or and SDIRA, and the simplest way to think about them is that you don't own it. The government does. They have custodians that manage their money, and you are simply the beneficiary of that account. (This is why most IRA accounts use the initial FBO "for the benefit of") That is why you can't easily get to the money and have to pay taxes upon withdrawing it.

So, if you invested in real estate, and created some cash flow, the money MUST go back to the custodian and the IRA. If you want some of that cash, you can direct the custodian to send you some money and then you pay taxes on it. It is that simple.

There are two other important things to note:

First, you cannot buy properties in your SDIRA that way that you own your 13 units. That would be a prohibited transaction and self-dealing and would cause you to incur massive penalties, blowing up your IRA. The government does not want you to have any day-to-day involvement in the investment. Instead, you must invest in a purely passive way, such as a syndication.

Second, real estate is a tax-favored asset and investing in a tax-favored asset through a tax-deferred vehicle is a bad idea.  Tom Wheelwright has a chapter in his book Tax Free Wealth on why.  I sat down with a tax attorney and we looked at this in detail.  The truth is that investing in real estate through an SDIRA can often cause you to pay much more tax than if you took the money out, paid the tax, and liberated your money to invest in real estate.

Most of the people I know that started using SDIRAs to invest in real estate, eventually pull it all out to invest outside the SDIRA.

[Jeffrey Dixon]

The IRA will buy the property and own it, so the rents and profits must go into the IRA. You can take distributions from the IRA, but that it is only way to end up with the funds. You will pay taxes on the distributions.

[Brett Synicky]

@Marcus Robert Well done on your investment prowess so far.  A few things in response to what you wrote:

1.  Some employers, (when you're 50+) 401k adoption agreements will allow you to do an "in-service-rollover".  Basically you stay working there and rollover funds into another qualified plan.   Check with the plan administrator and use that verbiage.  

2.  59.5 is when you can take distributions without penalty.  As others have said there is no way for you to access those funds for personal use without taking a distribution which will be a taxable event...

3.  When you transfer retirement funds into a self directed account you can certainly buy real estate with it.  Something to consider is to convert the pre-tax funds/assets to Roth so you have tax free atm withdrawals at retirement.   When you convert an asset to Roth you have to get a third party valuation and often they come in at a major discount..25-60% so your taxable amount is way lower than the actual conversion.  

4.  Educate yourself on the differences between checkbook control and custodial control.   Also consider Checkbook IRA vs. Solo 401k.   Some significant differences between the two.  

Godspeed in this journey.  

[Todd Dexheimer]

Most of our investors use Madison Trust for their SDIRA. Directed Trust is another common one. Both have been good to work with on our end and seem to do a good job helping our investors.