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?

[Steven Hamilton II]

Originally posted by Nathan Emmert:

Good point Andy... buying a property in cash with your SDIRA... but part of that would also depend on your risk tolerance... given 5% interest rates, would you rather buy 1 property in cash or put 25% down on 4 properties? Long term, I think you'd be better off in the 2nd scenario though obviously it's a more leveraged and therefore a more risky position. Granted, if you already have 10 mortgages, things skew a bit... but there's always creative financing and other ways to get beyond that limit too.

I'm sort of stuck in between... we have money in an old 401k from past employers... we can either just withdraw it and take a 20% tax hit... or roll it into an SDIRA. Given the amount, rolling it into an SDIRA doesn't seem to give us much bang for the buck due to the non-recourse lending standards so we'll probably just take the 20% hit and go on our merry way.

Nathan, It is not necessarily just a 20% hit. If you and your wife are in the 25% bracket without any withdrawals, you'll be taxing this income at that rate and possibly higher. Then you will also have an additional 10% early withdrawal penalty. That's 35% not just 20%. If you want to just pay the taxes on it and avoid the 10% penalty. You could consider a Self directed ROTH IRA.