$50,000 to invest... where is the question?

Question

I have around $50,000 in a 401K and I'm wondering if I should leave it where it is or if there is another investment that would yield more money in my retirement years, which could start as early as 2-3 years from now. Because of my age, 59 1/2, I can take some, or all of it if I wanted, without penalty. But I would have to pay taxes on it, and I'm already in high tax bracket. I originally was going to use some of it as a downpayent for rental property and then Covid19 hit and there are so many unemployed in the area I'm in that I'm not sure I want to do that now. I'm kind of just sitting on the sidelines now seeing what happens with the economy and hoping the stock market doesn't crash in the meantime. I do own two homes now, one is my primary residence in the larger city (Minneapolis) and one is my weekend home/ will be retirement home about 3 hours away in a more rural setting in central Wisconsin, which is where I would like to invest if I did end up purchasing rental properties. I'm estimating that when I do sell the house in the cities I would clear around $50,000 - $80,000 on it in a couple of years. But that is going to depend on the housing market too. Sure wish I had a crystal ball. Any insight would be appreciated.

Adam Tafel · Answer

Sharlene- definitely speak to a financial advisor before pulling out of the stock market, I am not qualified to advise you on that front. You have options, it's possible to convert a 401k into a self-directed IRA and invest in real estate, but there are stipulations. Are you still employed?

Covid19 presents an interesting time for investors, many are a bit nervous at the moment. We are seeing an overwhelming majority of rents being paid, as the government's response to temporary unemployment has been generous. The multifamily market in the Twin Cities is still very hot, we are seeing most investment properties go into multiple offers right now.  I'm personally still looking for investments, although my criteria for cashflow and vacancy projections are higher, in order to protect myself.

Timing the housing/stock market it tough. You've got many moving pieces here, and things aren't going to line up perfectly. All my clients are asking similar questions right now (is this the right time, should I wait, what's going to happen, etc). My answer is always the same - the search for an investment property generally takes at least 6 months, assuming you aren't willing to overpay. Build your team, get you ducks in a row, make a plan. You don't have to buy if things still feel shaky, but you want to be ready when opportunity knocks.

I've got a few colleagues who work in Central Wisconsin, I grew up in Eau Claire. Feel free to reach out if you'd ever like to talk!

Daniel McNulty · Answer

@Sharlene Burch

Liquidating or even repositioning retirement assets can be a complex tasks.As others have pointed out there are options to invest in RE such as through self directed IRAs. However, there are quite a few regulations to follow in such a scenario.

Whatever you are inclined to do, there are likely tax considerations now or in the future that should impact your process. More importantly, you should probably consider the hands on effort that can be required to manage your own rental property.

Its all about balance... Good Luck!

Danny McNulty

Financial Advisor

Tim Swierczek · Answer

@Sharlene Burch I'd recommend that you contact @Scott Jensen.  He's my financial planner and services many local RE investors.  He will be able to work through many options including ones you might not normally consider.

Joseph Hammel · Answer

I went with Advanta IRA for the administration of my self directed "checkbook" Roth IRA. I would recommend them. They were very helpful with the initial setup and the ongoing support is excellent. The annual fee is only $295 and the transfer fees were reasonable. They also let you pay any fees with outside money, I just keep a card on file for any fees. Other than the annual fees the only other fees are when you transfer funds into the operating company.

Dave Wolcott · Answer

@Sharlene Burch Did you know that part of the CARES ACT allows you to take out up to $100k from your IRA with no penalty and taxes aren't due for 3yrs.  Given this it could be a good time to reposition your 401k.

Rather than looking at just one tactic I always prefer to find ways to have my money working for in multiple ways.  An option could be to 1) take the 401k $ out now with no penalty, 2) put it directly into a properly structured infinite banking policy, then 3) leverage 80-90% of the cash value to purchase a multi-family syndication.

This strategy would provide multiple benefits to your precious capital and provide some flexibility until the time is right to purchase a syndication.  I believe the current market needs to settle down from the impacts of COVID which may take a few months as buyer and seller expectations become closer in alignment.  Investing with proven operators, in high growth markets, conservative underwriting and strong capital reserves to mention a few.

I would recommend speaking to your CPA and financial advisor, however this strategy could yield:

• - tax free growth in the IBC
• - tax free income in the IBC
• - having your $ work in multiple ways
• - income growth thru the spread
• - preservation of capital
• - tax efficient passive income
• - much better returns than the 401k on its own

George Blower · Answer

Keep in mind that in order to take a distribution under the CARES Act you must have been impacted by the virus in one of the enumerated ways.

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

George Blower · Answer

@Sharlene Burch

Please see the following regarding Considerations re Investing in Real Estate & Considerations re Choosing a Solo 401k provider:

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company that allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will use debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Considerations in Setting up a Solo 401k to invest in real estate:

1. First, you must be eligible to set up a Solo 401k. In order to be eligible, you must be self-employed (e.g. providing goods and/or services through your personal effort), reporting self-employment activity on your taxes (e.g. Schedule C if you a sole proprietor) & you do not have any w-2 employees working for your self-employed business or otherwise.

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. All of the income and expenses will need to flow in and out of the retirement account.

4. If you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira...

5. You can't live on the property or otherwise use it for personal use.

6. You can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. You must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. You should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Considerations in Choosing a Solo 401k Provider:

1. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

2. You may wish to confirm that the new 401k provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

3. You may wish to confirm that the new 401k provider will handle the ongoing compliance support such as any required 5500 filing (e.g. 5500-ez for a one-participant plan with assets in excess of $250,000), any required tax reporting (e.g. 1099-r in the event of a distribution or in-plan Roth conversion), mandatory plan updates and amendments, etc.

4. If you might take a 401k loan, you may wish to confirm that the new 401k provider will prepare the required 401k participant loan documents.

Here are some issues to consider in choosing an Self-directed IRA provider:

1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.

2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.

3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.

In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.

Kelly A. · Answer

Now is Always the Perfect time to invest. More fortunes are made when most people are nervous to invest. BUT you gotta know the right strategy to employ. Structure those deals in ur favor.

Brock Mogensen · Answer

I think investing it in a cashflowing property is a great idea!  I personally think there will be some good opportunities coming online later this year.  I invest heavily in the Milwaukee market.  Feel free to reach out with any questions.  I'm happy to put you in touch with the right people.

Joseph Hammel · Answer

Hi, I'm living in the Eau Claire area now. I just moved here from Lake City, MN and have 38 units back there. I'm moving on some new deals in this area. I think there are opportunities now of people looking to cash out their investments in property. I also already had a property in a self directed IRA and just bought a property within that company as well. Reach out if you want to chat.

$50,000 to invest... where is the question?

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