Self directed ira to avoid taxes?

Question

If I save money in an IRA can I avoid being taxed on that money and invest in real estate with it at a later time?

Dmitriy Fomichenko · Answer

I don't agree with you that returns with real estate are limited when used as investment inside of a 401k. One of my clients @Shawn Holsapple was able to triple his account value in less than a year, I don't think you can do that with conventional IRA. True - there is no depreciation deductions (in most cases) which is used to offset your income when you own real estate personally, but when you own real estate inside of a 401k the income is sheltered because it is a tax-deferred vehicle. Financing is available, but the loan must be non-recourse. While most banks don't offer such financing there are several lenders who do and getting approved is pretty easy if the property qualifies. Try these companies: https://www.biggerpockets.com/blogs/2810/50272-lis...

Brian Eastman · Answer

@Jordan MoorheadIf you are self-employed and have no full-time employees, then a Solo 401k may be an option. The maximum contribution limit is $54,000, dependent on income.

JR M. · Answer

Jordan Moorhead it can be done if you want the real estate to be a retirement income vehicle, but be aware that you may be limiting the returns on the real estate. A 401k is a tax shelter and so is well thought out real estate, so you would be putting a tax shelter inside a tax shelter. This will limit your access to the depreciation and often times bank financing.

Justin Windham · Answer

@Jordan MoorheadIf you are self-employed with no full-time employees, the Solo 401k will likely be the best option for you. The plan can be setup to allow for both pre-tax contributions and tax-deferred growth as well as Roth contributions with tax-free growth.

Mark Nolan · Answer

@Jordan MoorheadFollowing are the similarities and differences between the solo 401k and the self-directed IRA.The Self-Directed IRA and Solo 401k Similarities Both were created by congress for individuals to save for retirement;Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;Both allow for Roth contributions;Both are subject to prohibited transaction rules;Both are subject to federal taxes at time of distribution;Both allow for checkbook control for placing alternative investments;Both may be invested in annuities;Both are protected from creditors;Both allow for nondeductible contributions;Both are prohibited from investing in assets listed under I.R.C. 408(m); andNeither may be invested in your own business. The Self-Directed IRA and Solo 401k DifferencesIn order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;To open a self-directed IRA, self-employment income is not required;In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;The solo 401k allows for checkbook control from the onset;The solo 401k allows for personal loan known as a solo 401k loan;It is prohibited to borrow from your IRA;The Solo 401k may be invested in life insurance;The self-directed IRA may not be invested in life insurance;The solo 401k allow for high contribution amounts (for 2017, the solo 401k contribution limit is $54,000, whereas the self-directed IRA contribution limit is $5,500);The solo 401k business owner can serve as trustee of the solo 401k;The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;Pre-tax IRA contributions on reported on line 32 of Form 1040;Pre-tax solo 401k contributions are reported on line 28 of Form 1040;Roth solo 401k funds are subject to RMDs;A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);Roth IRA funds are not subject to requirement minimum distributions (RMDs);The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; andAt termination, the self-directed IRA is only required to file a form 1099-R.

Edmund Ricker · Answer

@Jordan Moorhead your contributions to the a traditional 401K would be with pre tax dollars and earnings would grow tax deferred. You might also consider a Roth 401k that would be funded with after tax dollars and earnings would grow tax free.Your best bet is to consult a tax advisor who can examine your individual situation and give you the information necessary to make an informed decision.Let me know if I can be of any further assistance.Ed

Jordan Moorhead · Answer

Brian Eastman and I can contribute to that tax free?

Daria B. · Answer

Have you looked into Solo 401k, I believed they are for self employed but not sure of the limits.

Jordan Moorhead · Answer

Brian Eastman I own a small business. Is there a way to put aside more than the normal $5500?

Brian Eastman · Answer

@Jordan MoorheadYes, an IRA is a mechanism to set aside a portion of your income and defer the taxes on that income. Growth the IRA receives via investment returns are also tax-deferred. That allows you to grow the IRA and generate tax savings.If you do not have any IRA savings at the current time, then setting up a plan with a generic Wall St firm will be your best option until you squirrel enough away to start thinking about investing in real estate.It is a long term strategy, but one that will reward you well.