SDIRA vs After Tax Cash

[Nathan Emmert]

I'm curious if anyone has run a comparison of the returns on a Self Directed IRA versus simply using after tax cash.

So funding a SDIRA has an obvious benefit, tax savings. With all the deductions and credits, etc etc etc, lets assume our real tax rate is 20%. I can fund $10,000 (for a couple) into 2 SDIRA accounts or fund $0 and have $8,000 cash after taxes.

From an investment point of view, I can take that SDIRA and buy real estate... but I must buy with a non-recourse mortgage. That means I need 40 - 50% down and will be paying 6.5 - 7% interest. On a $200k property, that's a $90,000 downpayment and $695 monthly payment.

With Cash, I can get in at 25% down and get SFH (4plex) at 5% interest. That'd be $50,000 down and a $805 payment.

The extra $40,000 cash only returns $1,320 a year (cash on cash) which is 3.3%... pretty crumby. Sure, I save taxes again on the cash return but with depreciating of the unit, most of that "profit" is wiped away in taxes anyhow.

Just curious what people think... is it worth funding a SDIRA for real estate investment or better just leaving the money in your checking account and taking the hit? Obviously if you're rolling over a 401k that had company matching or something the numbers change some... this is simply would you put $10k a year in an SDIRA or simply real estate invest with cash?

[Nathan Emmert]

Patty... you could always liquidate your SDIRA, take the 20% hit, and have $36k in cash.

From there, you buy a $144k worth of property(s) with your $36k down (25%).

Assuming 50% and 2% you're pulling in $2,900 in rents, clearing $1,450. Assuming you have strong credit, you're getting 30 years financing at 5% on the $108k you mortgaged and are paying $580 a month towards your debt leaving you with $870 a month in free cash flow.

Based on your $45k, you're now getting $10,440 a year in returns, or 23.2%.

It is easy to get "good" returns like 8 - 10% fairly low risk. Most of the "investors" here are looking for better than that.

Big issues with SDIRAs are two fold. Being tax advantaged they double dip the depreciation deduction so many investors like. Investors can make $5,000 free cash flow and deduct $5,000 of depreciation in the property. They get cash in their pockets and don't pay Uncle Sam. With the SDIRA, they wouldn't have paid Uncle Sam anyhow.

The second issue is the requirement to do non-resource loans. To maximize your returns you need to be leveraged. Because the loans are non-resource you'll put anywhere from 35 - 50% down (vs. 25%) and you'll pay 6.5 - 7% (vs 5%).

Just some things to think about. Generally if your employer does matching on contributions, it's sort of a no brainer, but at some point, all these tax advantaged programs really need to be evaluated to see if they are your best alternative.