Rolling Retirement Fund into Real Estate Fund

[Micah Watson]

My great uncle was a multi-millionaire who took his own life roughly 20 years ago. He left all living family members individual trust funds/retirement accounts conservatively invested in some sort of mutual fund. For me it was always a novelty thing but nothing to hang my hat on, being that I wouldn’t have access until retirement age. After all, who knows if this fund would zero out completely before then or simply fail to yield much of a return. I never bothered to study up on it. 

I found out today that until March, I have a one-time opportunity to access my account to withdraw or roll over into an IRA, and pay some sort of penalty. I need to get my hands on the notice to see what the details are, but I'm curious what you would do. I believe my account has somewhere just shy of 100k. My initial thought is that I would pay less in penalties if I rolled it into a self-directed IRA and I could use that IRA to invest in real-estate.

I'd love to hear the pros and cons on this. For instance, would it be virtually impossible to use leverage in an IRA? Or could it be done if the loans were non-recourse? I don't want to trade a low performer for an average performer, if I could instead leverage and get 20%+ through creative investing.

[Brian Eastman]

@Micah Watson

If an option is to rollover to an IRA, then that would likely be most productive as you would not have erosion in value due to taxation.

A self-directed IRA can invest in real estate in many ways. The key is that your role is purely administrative in nature. You may not personally benefit from the IRA (other than by growing the account and/or taking taxable distributions), nor may you add value through your own efforts or services.

An IRA may leverage using non-recourse debt. This does create a small tax liability on the portion of the income that is derived from the borrowed funds.

One of the biggest concerns would be maintaining enough liquidity via reserves and/or income to meet your needs to take required distributions from the inherited IRA.

So, certainly worth taking a deeper look, I would suggest.

[Carl Fischer]

@Micah Watson

I’m somewhat perplexed as to what type of account you are inheriting that did not require you to take distributions? What type of returns has the account yielded? Was it $20k increased to $100k or $1M decreased to $100k. That may influence what to do. 

[George Blower]

@Micah Watson

If he left his IRAs to living trusts, then the beneficiary IRA rules would come into play.

https://www.irs.gov/retirement-plans/required-mini...

[Micah Watson]

I have more clarity now. My uncle gave all his living relatives, via his company, 4 gift notes or promissory notes. They were held in a local financial institution and the interest earned was 1% below prime with a custom maturity date set at each recipients 60th birthday. Because they weren’t technically retirement funds, the company was able to offer early payment, with a 20% penalty attached. The only taxes owed are personal income taxes on the earned interest. 

I decided to take the payout, and incorporate the funds into my BRRRR strategy to get a better ROI.