Solo 401/SD IRA, vs Cash Out, vs Whole Life Insurance

[Nathan Herber]

Hi Bigger Pockets Community! Merry Christmas and Happy New Year to you and your family.

So, I am going down the rabbit hole of researching moving my 401k and my wife's 403b from a former employer to a Solo 401k and a personal Roth IRA to a Self Directed Roth IRA. My question why did you decide to either cash out your retirement investments (and pay the taxes) or, moved them to a solo 401k and/or SD Roth IRA? I have read most of the regulations such as, UBIT tax, Solo/SDIRA can only be applied to non-recourse loans, solo 401k is more flexible than the Roth IRA, and it's better to set up an LLC for the Solo 401k to create a tax ID number for plan contributions etc.

I have to make a decision to move my retirement funds with my former employer's investment institution by March. My goal is to position my retirement funds so they are ready to deploy toward a deal. My three strategies are:

1. 1. Cash out, pay the UBIT tax and report the additional income that year, and if a deal is made next year, implement a cost segregation on the multifamily property to help reduce the taxable income.
2. 2. Move the funds to a Solo 401k / Roth IRA. I'm more limited to certain deals as a JV, but I can move the funds now with no penalty, taking advantage of the stock market/investment fund's all-time-high, and cash out later (or partially) if a recourse loan deal becomes available.
3. 3. Whole Life: With option #2, I must pay myself back over “x” years. While I’m still getting my head around this concept, the 3rd option is to cash out my retirement and place it into a Whole Life Insurance vehicle (infinite banking concept) to take loans against it for around 5% for real estate investments while the policy accuses/compounds over time, ie. 5 years (super simplistic for the purposes here).

I'm in my late 30's if that plays a factor into your answer.  I'm interested to hear how you came to your decisions and lessons learned.  

Thank you!

Nathan

[Zachary Paschke]

The gentlemen above are mostly right. I think you understand that. Life insurance is not an investment. Term insurance is less expensive than whole life (because term rarely pays out). It is a hedge against investments.

A whole life policy with Guaranteed interest at 4% and a dividend generally around 5% Is a compelling offer. As you know. If you structure it properly you’ll have more cash value than you paid into the policy. You can borrow against the cash value (generally it will cost the amount of guaranteed interest + 1%. In this example 5%). A company with a strong dividend will continue paying you more than the coast of the loan. 

I’m not aware of any other financial instruments that will let you borrow against it and pay you more than the coast of the loan while you invest the money from the loan. Especially considering a life insurance loan is generally tax free. 

As an agent, I can make more money off a term policy (why agents like the buy term and invest the difference concept- don’t get me wrong. I do too) than a properly structured whole life policy. The more favorable the policy for you, the less I make and the more work it takes on my side.

That said @Carl Fischer is right. Life insurance won’t keep you from having the tax burden of cashing out your investment. That’s a real consideration.