newbie self directed question

[Ryan Watson]

I recently found out about being able to open up a self directed IRA for investing in real estate. What i am eager to know are the stipulations? Can it be my primary residence or do I have to do something else with it, like rent it out for cashflow?

Im not under pressure to use funds from my 401k, which has between 10 and 20k in it. Its doing well on interest and by rule of 72 it should double in 4 years. What do you all think?

[Doreen Chaisson]

Both SD IRAs and Solo(k)s are good vehicles for real estate investing. If you are self-employed and your business qualifies you to have a Solo(k), then that may be the better route due to the much higher contribution limits and absence of UBIT on leveraged assets. Generally your business can have no other full-time employees working more than 1000 hours per year. There are some other exemptions you should research. Only the account owner and spouse are eligible to be Solo(k) plan participants.

With respect to borrowing from your Solo(k), you can borrow up to $50,000 or 50% of your plan value, whichever is less, provided your Plan document has a provision allowing participant loans. You have to make regular ( at least quarterly) and substantially level payments back to your Solo(k). The loan must be paid back within 5 years (unless you are using it to buy a principal residence) or it will be deemed a taxable distribution.

While you can take multiple loans, the aggregate amount borrowed from the account cannot total more than $50,000 or 50% of the account value in one year. There is a formula to figure out how much may be available for additional loans in subsequent years while an initial loan is being paid back.

This is a strategy that should be discussed with your accountant. You will be paying the loan back with personal income that has been taxed once already, and then paying tax on the same money again when you take the funds out as a distribution in retirement, unless they are in a Roth (and your Roth contributions have been taxed once already).