Growth Strategy and Self Directed IRA Rules

[Mas Yoshida]

Hello fellow BPers!

I'm a newbie investor who has been looking for my first buy and hold property for the past couple months. As I continue my search for the first rental, I am debating my overall strategy on how I should use my capital currently sitting in my Roth IRA.

My question is three-fold:

1) I know there are two schools of thought on this.. but here it goes. Since I am in my growing stage of my hopefully long term real estate journey, I want to purchase as many buy and holds as quickly as I can (I am 30). The more properties I have with leverage, the faster I can save the CF gains towards the next property. With this in mind, I am contemplating taking capital out of my Roth IRA, take the penalty and tax hit to be able to grow as fast as possible in buy and holds. I don't have too much in my Roth, but it will allow me to buy at least one property with leverage. I can also just withdrawal the contribution amount and avoid the penalty and tax. I have a decent 401k for some diversification with stocks. Should I take the leap and use my IRA capital for real estate?

2) Based on my first question, a lot of folks will say to open a Self Directed IRA to avoid the tax and penalty. I am open to that. But back to being able to grow as fast as possible... I can purchase a rental using Self Directed IRA (with UDFI tax), but it will limit my ability to grow since I won't be able to say, 1031 into a multi-family or apartment using other properties/capital I have sitting outside the SDIRA. I can also invest in notes and diversify within real estate, but again will that diminish my ability to grow as fast as possible? Comfort level of risk comes into play as well, but has anyone crunched any numbers to determine what's the best path long term?

3) Let's assume I decide to open a Self Directed IRA and invest in mortgage notes. Is it within the rules to do private lending for a property that my father in-law holds the title for?

Any input is appreciated!

-Mas

[Brian Eastman]

@Daniel Cruz

A Solo 401k can also be referred to as an Individual 401k or Owner 401k.  This is a specific implementation of a 401k style employer retirement plan in an owner-only business, and is therefore much simpler to administer than a larger 401k that provides benefits to non-owner employees of a business.

A self-directed Solo 401k is such a plan that can be invested in anything the IRS rules allow, as opposed to just what an institution offering the 401k is willing to sell.  You can get a Solo 401k with a mainstream brokerage, for example, but would only be able to invest in stocks, bonds & mutual funds sold by the brokerage.

A Roth IRA may not be rolled over into a Solo 401k. The Roth portion of another qualified employer plan like a 401k, 403n, etc can be rolled over into the Roth portion of a Solo 401k.

The solo 401k does provide the ability to do an in-plan conversion of tax-deferred funds to Roth status (with the corresponding tax implications), and allows for generous new Roth contributions up to $18K per year.

A Solo 401k is exempted from Unrelated Debt Financed income taxation (UDFI) when using mortgages to acquire real property.  The plan is subject to UDFI on other leveraged investments not secured by real property such as margin trading in stocks.

A Solo 401k is subject to Unrelated Business Income Tax (UBIT) when engaging in a trade or business activity on a regular or repeated basis - as opposed to receiving passive income.  Passive income is interest, dividends, royalties and rent from real property.  Things like flipping houses or holding an equity stake in an operating business that provides goods or services would have UBIT implications.