All Forum Posts by: John Bowens

I will add that investing in a real estate syndication where you have Unrelated Business Income Tax (UBIT), if you are going to use a self-directed IRA, you might be better off using a Roth IRA, instead of Traditional IRA, due to the tax-free compounding growth of Roth. In some cases, you will find UBIT is wiped out by depreciation, you may even show net losses on the K-1, which can be carried forward to offset future gains. Then when property sells, you are subject to long-term capital gains, which is generally lower than the standard UBIT tax rates under the estate and trust tax schedule.

Kenny, first I would like to say, huge admiration for you! Getting started as young as you are, with savings and already contributing to a Roth IRA! I work in their retirement plan services business, and the biggest regret I hear from folks in their 40s-60s is that they didn't start saving early on in retirement plans. A Roth IRA, as I'm sure you are educated on, will grow tax-free and you can withdrawal tax-free in your retirement.

You have something that many do not have "Long Timeline" something you can't get back... Keep growing that Roth IRA, as the principals of compounding interest in the absence of taxation are powerful!

I agree with Jonathan on not allowing FOMO to force a decision that can later harm you. I like to follow this framework when investing 1) Does it make business sense (Do the numbers make sense. There are a lot of calculators and resources here in BP that I think can help. 2) How can you do this most tax-efficiently and 3) Does it make sense for your lifestyle. Not sure if you plan on pursuing a higher education, but that can be a factor that comes into play as well. Maybe a college rental semi-house hacking could be an opportunity. A good friend of mine did this and still holds the rental this day. 

Best of luck to you and keep up the hard work on savings and finding your path to investing! 
 

Megan, 

Not sure if I can help you exactly, but a few items that might help: 

1) As you are out having conversations with potential private money lenders, you can start the conversation about "Did you know you can use IRA, or old employer 401k funds to make private money loans, secured by real estate?" In fact, appears you are from Dayton, OH, I'm in Cleveland and I speak in Dayton area multiple times a year at various real estate investment clubs and groups. There is one coming up in Mason, OH - October 31-2nd, that I will be one of many speakers at. Just google Ohio Real Estate Convention and you should find it somewhere.

2) Some individuals are interested in passive real estate investing, but have little liquid cash, but significant savings in IRA and 401k accounts and are looking to diversify beyond just stocks, mutual funds, and other public market assets.

3) Always important to work with an attorney, title company, and or closing attorney as you work with a private lender. Lenders title insurance policy should be obtained and all documents properly prepared and filed accordingly. Although the investor is in the drivers seat, as the borrower you should be helping to provide a good experience as reputation is everything. 

Hope this helps and best of luck going forward for you! 

Great to meet you Jackson and thanks for the post. I'm an investor, and represent as Director of Education, Equity Trust Company, which is the custodian for Self-Directed retirement accounts, and then also Equity 1031 exchange, a QI. 

Maybe we are competitors, but would be interesting to see how, if at all, we might work together/collaborate. Always open to new introductions and connections in the 1031 and self-directed IRA/401k world.

Thanks! 

Anne, 

I will speak to your question with respect to borrowing against the 401(k). The rule of thumb is, only borrow against the 401k as a last resort option. Just as was mentioned above with the HELOC, I would use same philosophy with your 401k. The borrowing against a 401k could potentially come in handy for a fix-and-flip or BRRR type transactions as you can quickly return the funds to the 401k. Here are some important facts with respect to borrowing against the 401k:

1) It must be a 401k, once you rollover your funds to an IRA, you don't have that capability.

2) You can only borrow up to 50% not to exceed $50,000. 

3) You must make at least quarterly payments, with an interest rate set usually at prime + 1%. Your 401k administrator will help you set this up and usually you have to make monthly payments. 

4) If you default on your 401k loan, the entire balance is distributed to you, then you have to pay taxes and a 10% premature withdrawal penalty. In my research, default rates are pretty high amongst 401ks loans. 

5) If you leave your employer and want to rollover your remaining balance to an IRA to be able to invest in real estate, known as a self-directed IRA, you have to either A) Payoff the loan first, or B) When you rollover funds, the loan balance will be immediately distributed to you, thus taxes and penalties, and you forfeit all that tax-advantaged money back in the account.

6) 401ks are generally covered under federal ERISA rules, which affords you additional creditor protections, from outside of the 401k judgments. In other words, if there was a judgement against you, very difficult to impossible for them to come after your 401k money. 

7) Your 401k avoid probate when passing onto your heirs. 

Everyone's circumstances are different, so maybe it makes sense for you to borrow against the 401k, but I just think it is important that folks are fully educated on all factors before making that decision. 

Congratulations in advance purchasing your first rental property! As an investor myself, I can say, first transaction is always the most challenging and then each one gets easier. 

If you are identifying individual private money lenders, you can consider having a conversation with them about using their IRA, previous employer 401ks, or other retirement accounts. Some individuals are afraid of diversifying all their money in the stock market and might be interested in holding real estate backed notes.

I can't connect you with IRA/401k lenders, but certainly you can educate folks on this concept. Some folks might have far more retirement dollars than personal cash, thus more likely to lend from their retirement account. It is not a distribute if setup the correct way. Your lender will need to work with a Self-Directed IRA custodian. I represent one, but there are a handful out there.

Hope this helps. 

Although I can't help connect you to lenders, I will say that retirement money, such as IRA, previous employer 401k money can be a great avenue when seeking private money. When you come across an individual that might be interested in private money lending, you can educate them on being able to use their Self-Directed IRA, Roth IRA, etc. to lend.

For example: 

A client recently by the name of John recently did this: 

1) He loaned $193,000 to a fix-and-flip investors, charging 14% 

2) For the loan to the flipper, John partnered his Roth IRA at 80%, his Traditional IRA at 16% and his Health Savings Account (HSA) at 4%. He stands to make over 22k 100% tax-free across all 3 accounts.

There is about $14Trillion in IRA/Roth IRA/SEP IRA/SIMPLE IRA funds in the industry.

Hope this helps for now, but best of luck as you continue to raise capital for your projects. Here to be a resource where I can. Thanks! 

You got it correct, whatever amount you contribute to the Roth IRA, you can distribute anytime tax and penalty free. IRS Publication 590 is a good resource to examine these items as well.

Regarding your question on how do individuals grow a Roth to those levels when they are limited to only $7,000/$8,000 a year. 1) Creative investing strategies. For example, I have a client who partnered his Roth IRA with only $13,000 with another investor on a $105,000 fix-and-flip. The Roth IRA and his money partner agreed to split the profits 50/50. The Roth IRA, grew from $13,000 to over $47,000 on that one transaction. Now, you can't do this with yourself, your business, and certain family members, due to the prohibited transaction rules governed by the tax code 4975. 2) Some individuals have large pre-tax 401ks that they rollover and then convert to the Roth IRA, paying the taxes now so they dont have to pay later out of the Roth.

Hope this helps, but certainly feel free to reply as you have more questions. 

Kylie, 

You referenced Roth IRA, so I will provide some education on this topic to hopefully help you:

1) Roth IRA contributions, can be distributed from the Roth anytime tax and penalty free. Many are not aware of this. For example, in 2024, you can contribute $7,000 when under the age of 50, and $8,000 when 50+. Let's say you are 30 years old and you make over the next 10 years, $25,000 in contribution, we shall call this your basis. Let's say you make $20,000 in income from that basis, which of course grows tax-free. Now let's say at the age of 40, you could really use that $25,000 basis. Despite being under the age of 59.5, which is the qualified retirement age, you can distribute the $25,000 because it is after-tax Roth contributions. I like to call this a nice safety net for those that our younger and looking to save but fear locking up all their capital.

2) Keep in mind to contribute directly to a Roth IRA, you need to be under the Modified Adjusted Gross Income (MAGI). For example, in 2024, as a single individual, you make less than $146,000 MAGI, you can make a full contribution to the Roth, $230,000 if married filing a joint return. If you are over these amounts, you can do a backdoor contribution, which is contributing to a Traditional IRA and then immediately converting to a Roth IRA. Keep in mind though, the distributing from basis, won't work in this case, but you still have tax-free Roth savings. There are hardship withdrawal provisions and others that can be exercised if you meet the requirements.

3) If you have access to a workplace plan, like a 401k, with a Roth component, you can consider that as well. 

4) If you setup your Roth with a Self-Directed IRA custodian, they can allow you to invest in assets like real estate, private lending, private equity and other alternative assets.

Worse case scenario you distribute from your Roth early and pay taxes and a 10% penalty. Should not hold one back from contributing. 


Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.

Great to hear about the pursuit of a multi-family property! I picked up on that you were looking at using your 401k as part of the down payment. I can't say don't do that, however, you should consider a few things before raiding the 401k for down payment money, and maybe there are other options. Here are a few considerations with respect to the 401k: 
1) Although you can take funds with no penalty for first time home buyer, you can't return the money to the 401k. 401(k)'s have unique tax advantages that allow for tax-deferred, or in the case of Roth, Tax-Free growth. One day, you might regret taking the funds from the 401k. 

2) You could consider borrowing against the 401k, whereby you can borrow up to 50% not to exceed $50,000. You must make payment back at prime + 1%, and if you miss payments the balance is distributed, which can have severe tax consequences and penalties. That said, likely a better option than #1, and you are paying interest back to yourself. 

Hopefully this helps some as you make your decision and congratulations in advance on your ambition journey to real estate investing. Tons of admiration for folks getting started. As a RE investor myself, the first one is always the most challenging... Keep working hard!