Using cash flow from rentals to fund IRA?

Question

Dmitriy Fomichenko · Answer

@Craig Garrow

you can't use cash flow from your rentals to fund an IRA or any other qualified retirement plan. You need earned income for that. Rental income is 'passive' in it's nature.

Rajeev Kotyan · Answer

@Craig Garrow: Rental Income in itself is "passive income", but paying a property manager (including yourself) from the rental income, converts that portion of the rental income into "earned income". But there are steps to be followed: You have to materially participate (i.e. you have to be a designated property manager, and in some states even licensed to be one), you have then show the actual payments being made (even if it is a transfer from one account to another), you have to issue the appropriate tax filing document, and then you can actually deposit that earned income into your retirement account.

Please do note that I am not a CPA or an attorney, and this is only an example, so do consult a CPA or attorney for your specific situation to work for your benefit.

Gabe G. · Answer

Agree, you can't use "cash flow" to directly fund IRA's.

It needs to be "earned income" from w2's.

If you have w2 income, and cash flow, then yes, by all means fund your ira. But from the irs prospective that money will be coming from your w2 job, not cash flow.

Dmitriy Fomichenko · Answer

@Edward B.

borrowing against your policy's cash value might be great thing, but what many people are blindsided by are the high fees associated with such policies and if you are willing to take the initiative you can achieve much higher investment returns investing on your own.

And you pretty much answered your own question, savvy investors here understand that they can do much better making their own investments and not paying fees to insurance salespeople instead of paying the fees in exchange for mediocre returns offered by the insurance companies.

Jeff B. · Answer

Some dislike the following, but an insurance annuity can be useful  here.

Edward B. · Answer

@Dmitriy Fomichenko,

Excellent point. However, you can use passive income to pay for expenses that would otherwise be covered by your earned income, and then use that freed up earned income to fund your IRA. It is an important distinction, though, if you are living off of passive income or not generating enough earned income.

@Thomas Rutkowski,

What is "iffy" about it to me is that it is often being heralded as the end all be all to investing. The greatest thing since sliced bread. A sure bet. Yet, if it is so great, why are there not more people taking advantage of it. Especially many of the savvy investors here. I am not saying that it is not a great investment or even the best investment. I am saying that there has to be more to it than what you are saying. Yes, borrowing at a lower rate than your investment is earning and then investing that money at an even higher rate is a no brainer. So is locking up a house under contract and then assigning that contract to another investor for a huge profit. The reality is that neither is really that simple.

Having said that, I had already bookmarked your website from a previous post and will reach out to you to learn more. I am open to innovative investing strategies, but also a bit cynical. Unlike the naysayers in the other thread, though, I will give you the opportunity to convert me.

Thomas Rutkowski · Answer

There's really nothing "iffy" about the cash value leveraging. Every state requires that insurance companies provide loans against a policy's cash value. Its really no different from taking a loan against a home or even borrowing against a brokerage account and investing the loan proceeds. Its simply a way to put your money to work in two places at one time. What makes life insurance a much safer way to do it is the principal protection.

What's not to understand? You put your cash into an asset that can earn 6-8%. You can borrow against it at 4.5% to 5% and use that money to invest in real estate that potentially earns even more. You just need to make sure that you are dealing with an agent who fully understands how to design a high cash value policy with low/no surrender charges so you have immediate cash value and access to the cash value.

Once you fully understand how it works, I assure you, you will stop putting money into IRAs and only use this strategy.

This is the primary focus of my business. I'd be happy to talk and address your concerns. Most of the negative comments on BP come from people that don't understand how life insurance works.

Edward B. · Answer

@Craig Garrow,

I always max my tax advantaged accounts. It is trickier to get at the money to invest in real estate but definitely doable. Tax free growth is pretty hard to beat so if you don't need the money it sounds like a great long term wealth plan to me.

I am intrigued by the "infinite bank" plan sold by these high cash value insurance policy people but have not done enough research to pull the trigger. It sounds a little iffy and I think there are some gotchas in there that are not being highlighted. That doesn't mean that it is a bad investment, though, especially if it is just part of an overall strategy. I have to look into it more. I will say this, I think there are definitely creative ways to use insurance to facilitate your RE investing and wealth building strategy, I just haven't totally figured them out yet.

Using cash flow from rentals to fund IRA?

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