Using a Pension distribution for real estate - Penalty Avoidance?

Question

I recently was offered a pension lump sum payout by a previous employer. As a 45 year old, I have a few years left until retirement. I have 13 vested years with this previous employer with a monthly payment estimated of just over $1100 per month after age 67. I realize that 1) that amount doesn't grow, and 2) it is a guaranteed monthly income for life. This is a very well-known and very stable company any household around the world would recognize. The risk of them "going under" is small. I believe I can get a better return in the next 20 years until retirement by investing correctly in real estate under a 15 year mortgage. My question is this: Is a self-directed IRA the right way to go to take the pension payout? If so, how does one fund things such as maintenance expenses, etc., with self directed IRA funds.

Id also like to hear opinions on whether or not this is even a good idea to take the pension buyout or leave it be. Thank you for your time and opinions.

Id also like to hear opinions on whether or not this is even a good idea to take the pension buyout or leave it be.  Thank you for your time and opinions.

Account Closed · Answer

There are "check book IRA's" Some custodians allow them some do not. Such IRA's are very convent for taking care of repairs that must be immediately addressed. But beware. As @Brian Eastman said there must be arm's length transaction. For example, if the toilet needs repair you may not buy the parts, charge it to the IRA and fix it yourself. You may, however, hire a plumber to fix it and pay him from the IRA.

Jesse Hargrove · Answer

Account Closed  There shoud not be a penalty for taking a cash lump sum from your employer. You should be able to transfer the cash value directly to a self directed IRA. My wife and I have done this. The issue with pensions are when you die it dies too. We wanted to have something to leave to our family. Our realestate is cash flowing the same as our payouts would have been from our pensions. Along with the property appreciating in value. There is work involved with real estate and our money is in our own hands. I guess it is a decision of set it and forget it, than stick with the pension.

Or get involved in realestate. We sleep very good at night knowing that we are in control of our money. We have nothing to do with wall street. Good luck on whatever you decide, There is a lot of great information on BP to help you learn more.

Brian Eastman · Answer

Account Closed

The mechanics of dealing with IRA transactions will depend on the service you select.  If you work with a 3rd party custodian (generally a trust company) to hold the IRA, then you will submit paperwork to have them handle all plan transactions such as issuing checks to vendors, receiving rents, etc.

The alternative is a Checkbook IRA LLC or Solo 401(K) (if you qualify for the latter through self-employment).  With these plans, the IRA capital will be held in a bank account of your choosing and you will have signing authority.  You can issue a check or use a wire, etc., to pay for all operating expenses of a property such as property taxes, repairs, etc., without need for 3rd party processing.  For rental property, this is a much more efficient and effective business model.

You are allowed to administer the investment transactions and do things such as sign contracts, pay for expenses out of the plan and receive income into the plan.  You are not allowed to personally benefit such as by compensating yourself for those activities or using the property personally.  Conversely, you are not allowed to add value to the IRA through the provision of goods or services (i.e. sweat equity), as that would effectively be making un-documented contributions to the IRA.

Brian Eastman · Answer

Account Closed

Firstly, I would recommend you speak with a feel-only financial advisor who can help you understand the many factors that go into deciding whether a lump sum will make sense for you.  A pension provides a defined benefit, but it is not something that can be passed on to heirs other than perhaps your spouse.  If you can grow the lump sum at a more aggressive rate than the return provided by the pension, then that might make sense.

You would have the option to rollover the pension to a self-directed IRA or Solo 401(k) plan.  Such a plan can be invested in assets such as real estate and private lending instead of just the stock market.  As with any tax-sheltered retirement plan, it all has to be managed at arm's length and exclusively for the benefit of the plan.  When you want access to the funds (typically after age 59 1/2), you pay taxes on what you take out.  The plan pays for all expenses and receives all income produced by investments.

Account Closed · Answer

Jesse Hargrove, thank you for that.  That is exactly the thought process I have.  While my pension is with a stable company and the risk of itngoing away is small, at the same time it isn't growing, itnisnt liquid, and there's nothing to leave tonthe whole family after I'm gone.  With real estate, the value doubles about every 20 years, there's ongoing income before and especially after Iran paid off, and quite a bit to leave the family.

Account Closed · Answer

Thank you.  I just sent Quest a message.

Account Closed · Answer

I'm still debating.  The average annual return on real estate over the past 20 years is 3.4%.  While that doesn't seem like much, over a 20-30 year period the value of a home would double.  On top of the paid off doubled value, if you work it correctly, the profited gains from rent could be reinvested back into a retirement account.  Over a period of 30 years that alone could be a significant amount in a retirement account.

Account Closed · Answer

Hmmm.  This seems doable but complicated.  I'm now curious which is cheaper:  Take the pension distribution and pay the penalty or go the self directed route and deal with all the red tape associated.

Account Closed · Answer

Interesting.  I've done some in-depth analysis and believe I can grow at a better rate.  In my analysis, I used a historical average of 3% growth rate on the real estate.  I've targeted homes in strategic areas that have a high rental rates such as colleges and universities as well as military installations.  While I understand the risks associated with the property lying vacant, damage, maintenance costs, etc., I'm assuming your comment on "the plan pays for all expenses" means, basically, if something breaks, the plan pays for it.  If that is the case, my simplistic follow on question is "how"?  Since this is a IRA plan (self directed), how are funds withdrawn to pay for, say, a roof leak repair?  Is there simply a check-book tied to the SDIRA, etc?