SDIRA or withdraw cash

[Bill C.]

I wondering if I transfer the cash out pension to a SDIRA for RE investments or just withdraw cash over 5 years and deploy cash each year into RE?

[Brian Eastman]

@Greg Scott

Your numbers on UDFI taxation on debt-financed real estate are WAAAAY off, as are other statements you have made above. A checkbook IRA LLC does not automatically change tax rates to 21% unless a UBIT blocker is deployed, which would be the entirely wrong solution for this usage.

While you are welcome to express your personal opinion about the relative merits of investing tax sheltered money vs post tax money in real estate, it would be much more helpful to forum readers if you would avoid making factually incorrect arguments to support your point of view.  If you don't know the facts, then don't speak as if you are an expert.

When a deal is 75% leveraged, 75% of the income is being generated from non-IRA money. Your IRA is getting the benefit of leverage, which is great. However, 75% of the income in the deal - being sourced from non-IRA funds - is deemed taxable as Unrelated Debt-Financed Income (UDFI). That full amount is not taxed at 37% - not even close. You start with a $1000 exemption against UDFI off the top, then use the same debt-financing ratio of 75% of the allowable deductions like depreciation, interest on the note, property taxes, etc. The NET TAXABLE income will be a very small percentage of that original 75% of GROSS INCOME. The tax rate for most investors is then likely to be in the 10-25% range on those net-taxable dollars. The IRA pays that tax, which effectively reduces the rate of return on the investment slightly. The net effective tax rate is commonly in the 7-10% range for leveraged real estate deals in an IRA.

Leverage in an IRA boosts your cash on cash return. UDFI puts a small dent in that boost, but you still get the benefits of leverage and a higher net return than you would putting the same dollars into an all cash transaction. That is a win.

In order to take a distribution from the IRA before investing, you will pay taxes, which dramatically reduces the amount of capital you now have available to invest. You can start your investing with $100K in an IRA or $60-$70K in after tax money. $100K seems like it will buy more property and accumulate more value over time.

Yes, there are many advantages to investing in real estate with non-qualified funds. There are also considerable benefits to diversifying tax-sheltered retirement money you already hold into real estate instead of leaving that money in conventional financial products or taking a HUGE haircut to get it out of the retirement plan early. Each person's situation, goals, real estate expertise, etc., factor into what may be correct for them. As you have stated many times, killing your IRA worked well for you. I can list dozens of folks who have taken that approach and not made good returns in real estate for whatever reason and are now in serious trouble wishing they had not killed their IRA.