Using Tax Deferred IRA for Real Estate Investing

[Kevin Hayes]

I have cash sitting in a tax deferred IRA account. I am looking for alternative tax strategies to use in investing these funds for real estate investing. I realize by taking a cash distribution it would be considered as income and I would be taxed a minimum of 20% if not higher depending of my tax bracket for that year. I could have a Solo 401k account set up and have my funds transferred to it but I would not be able to utilize depreciation expense like I would be able to outside the account Any advice would be greatly appreciated.

[Brian Eastman]

@Bob Reinhard

If one is self-employed and has no full time employees, they can establish a Solo 401(k) plan. A Solo 401(k) can accept rollovers from most tax-deferred IRA plans and any tax-deferred or Roth employer plan such as a prior employer 401(k).

As an employer sponsored retirement plan, a Solo 401(k) has several advantages over an Individual Retirement Account (IRA), such as higher contribution limits, the ability to house both tax-deferred and Roth funds within the same plan, a participant loan feature, and an exemption from tax on the portion of income attributed to debt-financing in real estate investments (UDFI).

Not everyone qualifies for a Solo 401(k), however, and a self-directed IRA is still a fantastic way to take more control over your existing savings and be diversified.

@Kevin Hayes

Dmitriy has covered the topic well, but the key point in evaluating a self-directed strategy is to understand this is still tax-sheltered retirement money, not personal money. Investing rules and taxation are very different as a result. If you can grow and protect your retirement savings in a self-directed IRA or Solo 401(k) and investments in alternative assets like syndications better than you might by allocating 100% of that money to conventional publicly traded investments, then a self-directed retirement plan can make sense for you.