Has anyone moved their 401K to a self directed real estate one?
Member since 2024 · 18 posts · 9 votes
Has anyone moved their 401K to a self directed real estate one?
Most Popular Reply
Joe HomsBusiness Member
Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes@Rochelle Gerber yes about ten years ago and never looked back. It's been wonderful. Reach out to @Dmitriy Fomichenko who has the best options out there.
Good Investing...
22 Replies
- 1yJoe HomsBusiness MemberFlipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes
@Rochelle Gerber yes about ten years ago and never looked back. It's been wonderful. Reach out to @Dmitriy Fomichenko who has the best options out there.
Good Investing...
- Member since 2024 · 18 posts · 9 votes1y
Quote from @Joe Homs:
@Rochelle Gerber yes about ten years ago and never looked back. It's been wonderful. Reach out to @Dmitriy Fomichenko who has the best options out there.
Good Investing...
thank you! i will
- 1yBrett SynickyPro MemberSolo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votesYou’re most likely going to consider SDIRA or Solo 401k. Both will allow your retirement dollars to invest in real estate and much more. The IRA will have UDFI tax on leveraged real estate where the 401k will not. IRA annual max 7k vs 401k $69k. Solo 401k requires self employment with no full time employees other than you and a spouse. Hope this helps.
Quote from @Rochelle Gerber:
I may leave a current employer and therefore I believe I will be eligible to turn my 401k into a real estate investment product. Pros and cons? ability to use the whole amount and how so ?
- Member since 2024 · 18 posts · 9 votes1y
Just to clarify, are you saying I can put 69k a year into the 401? That would obviously be the route to go.
is there a limit to how much of the account you can use to invest? Say, I bring 250,000 or 500,000, how much or what percentage is useable?
and if the 401 “makes” more than 69,000 based on investment returns is that fine ? - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Rochelle Gerber:
Just to clarify, are you saying I can put 69k a year into the 401? That would obviously be the route to go.
is there a limit to how much of the account you can use to invest? Say, I bring 250,000 or 500,000, how much or what percentage is useable?
and if the 401 “makes” more than 69,000 based on investment returns is that fine ?you can really only do a solo 401k if you are running a company. I moved mine to a self directed IRA and yes I invested in real estate.
7e investments53 Reviews - Member since 2024 · 18 posts · 9 votes1y
Quote from @Chris Seveney:
Quote from @Rochelle Gerber:
Just to clarify, are you saying I can put 69k a year into the 401? That would obviously be the route to go.
is there a limit to how much of the account you can use to invest? Say, I bring 250,000 or 500,000, how much or what percentage is useable?
and if the 401 “makes” more than 69,000 based on investment returns is that fine ?you can really only do a solo 401k if you are running a company. I moved mine to a self directed IRA and yes I invested in real estate.
Well I would be running my own company
- 1yBrett SynickyPro MemberSolo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
Quote from @Rochelle Gerber:
Just to clarify, are you saying I can put 69k a year into the 401? That would obviously be the route to go.
is there a limit to how much of the account you can use to invest? Say, I bring 250,000 or 500,000, how much or what percentage is useable?
and if the 401 “makes” more than 69,000 based on investment returns is that fine ?The $69k max only relates to contributions. If under 50 the max is $69k. If over 50 the max is $76,500. Roth or traditional or combination. The contributions must be made from business income from the sponsoring business aka your self employment. You wear two hats, you’re the employee so IRS allows elective deferral (just like your current w-2 401k) up to $23k or $30,500 if over 50 AND the employer so you can also make profit sharing contributions of 20% if profit or 25% if gross payroll. Total cannot exceed $69 or $76,500
You can invest as much as you want and no limits on returns. In fact as the fiduciary your responsibility is to grow the account as quickly and effectively as you can. If you're going to be self employed with no employees other than a spouse there isn’t a better retirement plan than the Solo 401k.
I encourage you to check out the link I posted above for more info. - Member since 2024 · 18 posts · 9 votes1y
Quote from @Brett Synicky:
Quote from @Rochelle Gerber:
Just to clarify, are you saying I can put 69k a year into the 401? That would obviously be the route to go.
is there a limit to how much of the account you can use to invest? Say, I bring 250,000 or 500,000, how much or what percentage is useable?
and if the 401 “makes” more than 69,000 based on investment returns is that fine ?The $69k max only relates to contributions. If under 50 the max is $69k. If over 50 the max is $76,500. Roth or traditional or combination. The contributions must be made from business income from the sponsoring business aka your self employment. You wear two hats, you’re the employee so IRS allows elective deferral (just like your current w-2 401k) up to $23k or $30,500 if over 50 AND the employer so you can also make profit sharing contributions of 20% if profit or 25% if gross payroll. Total cannot exceed $69 or $76,500
You can invest as much as you want and no limits on returns. In fact as the fiduciary your responsibility is to grow the account as quickly and effectively as you can. If you're going to be self employed with no employees other than a spouse there isn’t a better retirement plan than the Solo 401k.
I encourage you to check out the link I posted above for more info.thank you so much! very helpful
- 1yJohn BowensBusiness MemberInvestor · Member since 2024 · 44 posts · 36 votes
In the spirit of order of operations, might be helpful to break down in this fashion:
1) With your 401(k), do you have pre-tax money and post-tax Roth funds? If so, you will need to rollover those funds into respective money sources of pre-tax and Roth.
2) Analyzing whether to use IRA or Solo 401(k), is fairly straight forward, when the intent is for you to have your own business and want to use the funds for real estate investing. Most likely you will establish a Solo 401(k), due to the additional benefits, some of which were already mentioned. If you have pre-tax and post tax Roth funds in the existing 401k, you will initiate a rollover into a newly formed Solo 401(k), with some funds dropping into the pre-tax bucket and Roth funds dropping into Roth bucket.
3) 3 benefits that I find many real estate investors are attracted to with the Solo 401(k): 1) Higher Contribution Limits (providing you have enough earned income) 2) Ability to contribute to Roth, without MAGI limits where you have to do a backdoor contribution, like you do a Roth IRA. 3) Exemption from UBIT/UDFI on debt financed real estate deals, this could be directly, or through a syndication type deal.
4) Now, we can proceed with, what about the caveats and qualifications to open and maintain a Solo 401(k): 1) You need to have earned income from the business/sole prop. that is sponsoring the Solo 401(k). Your contributions have to be recurring and substantial. I will say, being the industry for nearly 20 years, this is a huge problem. I see folks who have Solo 401(k)'s, but only have passive income. If all you do is own rentals for example, likely not qualified with a Solo 401(k). You might consider getting with your CPA and discussing a strategy to have a micro-business and show some earned income. 2) You can't have any W-2 employees, with the exception of yourself, a spouse, and any partners that own at least 5% of the business. (Keep in mind controlled group rules, meaning if you own a business with W-2 employees, you often can't just setup a side business and open a Solo without giving benefit to your W-2 employees with your main business - another area not often discussed in this industry until it is too late).
5) Lot's of pros with Solo 401(k)'s as you can tell from above with the UDFI exemption on debt financed real estate and ability to make larger contributions. There can be more compliance work and potentially higher costs compared to just a Self-Directed IRA.
6) If you decide to rollover to a Self-Directed IRA first (your pre-tax money) you can always rollover that money into a Solo 401k when you eventually qualify. Just keep in mind, if you move money into a Roth IRA, you can't move from Roth IRA into the Solo 401(k). You can however move from 401(k) Roth funds into the Roth bucket of the Solo 401(k).
Hopefully this gives you some ideas to run with.This should not be construed as tax, legal or financial advice. This is merely education. Please work this material through your professionals and seek the proper advice.
- Specialist · Grand Rapids, MI · Member since 2020 · 116 posts · 80 votes1y
Quote from @Rochelle Gerber:
Just to clarify, are you saying I can put 69k a year into the 401? That would obviously be the route to go.
is there a limit to how much of the account you can use to invest? Say, I bring 250,000 or 500,000, how much or what percentage is useable?
and if the 401 “makes” more than 69,000 based on investment returns is that fine ?There is more to the formula on how much you can bring in, assuming you're self-employed.
If you're an S-Corp, you can do the 23k as an employEE, then an additional 25% of your salary on top of that, with a maximum of $69k total. I own a custom 401k administration company if you have more questions.
- Investor · Coppell, TX · Member since 2018 · 311 posts · 166 votes1y
Quote from @Rochelle Gerber:
I may leave a current employer and therefore I believe I will be eligible to turn my 401k into a real estate investment product. Pros and cons? ability to use the whole amount and how so ?
@Rochelle Gerber absolutely! I do this all the time for my investors. First you will have to ensure your 401K is eligible for roll over to a SDIRA. As you said you are currently still employed there, so you can't do it right away until you leave employment there.
Second, once you've rolled over, you can setup your SDIRA as a regular account (where fund release has to go via your custodian) or setup a LLC checkbook option, where you can write out a check for your choice of investments.
Yes you will have full control over the use of funds in your rolled over SDIRA. I work with several custodian companies and depending on your account needs, can do a warm introduction to my contact. DM me for assistance.
- 1yBill HamptonBusiness MemberAccredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 977 votes
Here are some of the downsides of putting real estate into an IRA or 401k.
No tax deductions: You can’t claim deductions for property taxes, mortgage interest, depreciation, repairs, improvements and other property-related expenses.
Property expenses: All expenses, repairs, and maintenance costs must be paid with IRA or 401k funds, and you must pay others to do repairs and manage the property. You can't even change a lightbulb.
You or your family can't use or live in the property.
You can't sell a portion of a property like you can sell portions of stocks, bonds, mutual funds, etc. You may have to sell the whole property to access the funds in the IRA or 401k when you retire.
If you violate any of these rules you could blow up your IRA or 401k and the IRS could force you to distribute all of the assets in the IRA or 401k. This could lead to a huge tax bill and penalties at the end of the year.
Think carefully before you do this.
Good luck.
Hampton Tax and Financial Services LLC4.7106 Reviews - Member since 2024 · 18 posts · 9 votes1y
Quote from @Bill Hampton:
Here are some of the downsides of putting real estate into an IRA or 401k.
No tax deductions: You can’t claim deductions for property taxes, mortgage interest, depreciation, repairs, improvements and other property-related expenses.
Property expenses: All expenses, repairs, and maintenance costs must be paid with IRA or 401k funds, and you must pay others to do repairs and manage the property. You can't even change a lightbulb.
You or your family can't use or live in the property.
You can't sell a portion of a property like you can sell portions of stocks, bonds, mutual funds, etc. You may have to sell the whole property to access the funds in the IRA or 401k when you retire.
If you violate any of these rules you could blow up your IRA or 401k and the IRS could force you to distribute all of the assets in the IRA or 401k. This could lead to a huge tax bill and penalties at the end of the year.
Think carefully before you do this.
Good luck.
ok thank you . i will study this
- 1yBrett SynickyPro MemberSolo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
This is all true except the no expenses or depreciation part, you actually can do that in an IRA (just doesn't help you personally today) on leveraged real estate because that portion of the income is subject to UDFI/UBIT tax which is calculated after deducting the first $1000 and accounting for depreciation and expenses as it relates to the % of the mortgage. But she's more likely a candidate for solo 401k which is exempt from that tax on leveraged real estate.
Either way for many people it's a good idea to own real estate inside of and outside of your retirement account to take advantage of the tax benefits personally. But his is not the conversation though since the OP is talking about existing retirement funds that are currently invested in wall street. So the question for her to decide is do I want to continue investing my retirement in wall street or do I want to move some/all the funds into alternative assets like real estate that can far out perform the stock market.
You can get a loan to buy more real estate, nobody will lend you money to buy more s&p 500. All the rental income, appreciation and profit when selling is tax free! Yes it's true you're not benefitting from the tax benefits today, but that's not the point of a retirement account. It's tax deferred or tax free in a Roth. It's a tax advantaged account so there are no taxes in the IRA/Solo 401k today.
The rules are not hard to follow and of course you'll need to plan for RMD's unless Roth but if you start a few years out this isn't tough. It's myopic to look at real estate as only being a good investment outside of your IRA/401k. There's much more to consider than the negatives you mentioned.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
It's a bit cumbersome, you have to maintain strict financial separation, and because the loans have to be non-recourse, your LTV is lower. You also have to file UBIT taxes and most CPAs don't even know what that is. So maybe better to just invest unleveraged. But on the other hand, you can also convert into a Roth and enjoy tax-free rental income for the rest of your life.
Great book: Leverage your IRA by Mathew Allen. - Member since 2024 · 18 posts · 9 votes1y
Quote from @John Bowens:
In the spirit of order of operations, might be helpful to break down in this fashion:
1) With your 401(k), do you have pre-tax money and post-tax Roth funds? If so, you will need to rollover those funds into respective money sources of pre-tax and Roth.
2) Analyzing whether to use IRA or Solo 401(k), is fairly straight forward, when the intent is for you to have your own business and want to use the funds for real estate investing. Most likely you will establish a Solo 401(k), due to the additional benefits, some of which were already mentioned. If you have pre-tax and post tax Roth funds in the existing 401k, you will initiate a rollover into a newly formed Solo 401(k), with some funds dropping into the pre-tax bucket and Roth funds dropping into Roth bucket.
3) 3 benefits that I find many real estate investors are attracted to with the Solo 401(k): 1) Higher Contribution Limits (providing you have enough earned income) 2) Ability to contribute to Roth, without MAGI limits where you have to do a backdoor contribution, like you do a Roth IRA. 3) Exemption from UBIT/UDFI on debt financed real estate deals, this could be directly, or through a syndication type deal.
4) Now, we can proceed with, what about the caveats and qualifications to open and maintain a Solo 401(k): 1) You need to have earned income from the business/sole prop. that is sponsoring the Solo 401(k). Your contributions have to be recurring and substantial. I will say, being the industry for nearly 20 years, this is a huge problem. I see folks who have Solo 401(k)'s, but only have passive income. If all you do is own rentals for example, likely not qualified with a Solo 401(k). You might consider getting with your CPA and discussing a strategy to have a micro-business and show some earned income. 2) You can't have any W-2 employees, with the exception of yourself, a spouse, and any partners that own at least 5% of the business. (Keep in mind controlled group rules, meaning if you own a business with W-2 employees, you often can't just setup a side business and open a Solo without giving benefit to your W-2 employees with your main business - another area not often discussed in this industry until it is too late).
5) Lot's of pros with Solo 401(k)'s as you can tell from above with the UDFI exemption on debt financed real estate and ability to make larger contributions. There can be more compliance work and potentially higher costs compared to just a Self-Directed IRA.
6) If you decide to rollover to a Self-Directed IRA first (your pre-tax money) you can always rollover that money into a Solo 401k when you eventually qualify. Just keep in mind, if you move money into a Roth IRA, you can't move from Roth IRA into the Solo 401(k). You can however move from 401(k) Roth funds into the Roth bucket of the Solo 401(k).
Hopefully this gives you some ideas to run with.This should not be construed as tax, legal or financial advice. This is merely education. Please work this material through your professionals and seek the proper advice.
thank you very much. a lot to digest. it sounds like if my Solo business takes my existing 401k (only 401k funds I do not have roth funds) and my business pays me to flip homes and consult, then i can put my funds directly into the 401 solo plan. i will definitely reach out to my accountant as well.
- Member since 2024 · 1 post · 0 votes1y
Quote from @Rochelle Gerber:
Just to clarify, are you saying I can put 69k a year into the 401? That would obviously be the route to go.
is there a limit to how much of the account you can use to invest? Say, I bring 250,000 or 500,000, how much or what percentage is useable?
and if the 401 “makes” more than 69,000 based on investment returns is that fine ?
If my employee wants to cancel the 401k plan and invest in real estate and stocks, should I support him? I am not optimistic about the future prospects. - 1yBrett SynickyPro MemberSolo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
@Rochelle Gerber The Solo 401k is for the business owner and their spouse only. You cannot have a Solo 401k with full time w-2 employees outside of the married couple. You can have employees that work less than 500 hours per year but they are ineligible to participate in the Solo 401k plan. That said, a Solo 401k can easily invest in wall street by opening a brokerage account.
- Member since 2024 · 18 posts · 9 votes1y
Quote from @Brett Synicky:
@Rochelle Gerber The Solo 401k is for the business owner and their spouse only. You cannot have a Solo 401k with full time w-2 employees outside of the married couple. You can have employees that work less than 500 hours per year but they are ineligible to participate in the Solo 401k plan. That said, a Solo 401k can easily invest in wall street by opening a brokerage account.
I don’t know who posted that but I don’t have employees.
- 1yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
@Rochelle Gerber A self-directed IRA allows 401(k) funds to invest in real estate with these key points:
Pros
1. Investment Flexibility: Real estate, private lending, and more.
2. Tax Benefits: Gains grow tax-deferred or tax-free.
3. Potentially Higher Returns: Real estate often yields higher returns.
Cons
1. Strict IRS Rules: No personal use; prohibited transactions lead to penalties.
2. Tax on Debt-Financed Income: Subject to UBIT.
3. Illiquidity: Real estate is harder to liquidate quickly.
You can invest the full amount but must use IRA funds exclusively for property expenses, keeping personal finances separate. Don't forget that you can take out a 50k loan from 401k and buy in your personal name. Real Estate in personal name saves taxes at your personal level if planned correctly.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
INVESTOR FRIENDLY CPA®5241 Reviews - 1yBill LeBusiness MemberRental Property Investor · Richmond, VA · Member since 2019 · 26 posts · 2 votes
Quote from @Brett Synicky:
You’re most likely going to consider SDIRA or Solo 401k. Both will allow your retirement dollars to invest in real estate and much more. The IRA will have UDFI tax on leveraged real estate where the 401k will not. IRA annual max 7k vs 401k $69k. Solo 401k requires self employment with no full time employees other than you and a spouse. Hope this helps.Quote from @Rochelle Gerber:
I may leave a current employer and therefore I believe I will be eligible to turn my 401k into a real estate investment product. Pros and cons? ability to use the whole amount and how so ?
Interesting tidbit here. I didn't know that difference between IRA and solo 401k. If your max contribution for SDIRA is $7K a year, do most people just opt to keep mostly with stocks/bonds until they reach a certain point where they can invest? Seems like it would take a really long time before you can buy real estate if you're only allowed to contribution $7k a year.
KRS Holdings (Property Management)4.73715 Reviews - 1yBrett SynickyPro MemberSolo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
Quote from @Bill Le:
Quote from @Brett Synicky:
You’re most likely going to consider SDIRA or Solo 401k. Both will allow your retirement dollars to invest in real estate and much more. The IRA will have UDFI tax on leveraged real estate where the 401k will not. IRA annual max 7k vs 401k $69k. Solo 401k requires self employment with no full time employees other than you and a spouse. Hope this helps.Quote from @Rochelle Gerber:
I may leave a current employer and therefore I believe I will be eligible to turn my 401k into a real estate investment product. Pros and cons? ability to use the whole amount and how so ?
Interesting tidbit here. I didn't know that difference between IRA and solo 401k. If your max contribution for SDIRA is $7K a year, do most people just opt to keep mostly with stocks/bonds until they reach a certain point where they can invest? Seems like it would take a really long time before you can buy real estate if you're only allowed to contribution $7k a year.
Usually yes, however there are crowdfunding opportunities like sparkrental.com that allow for low entry.
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