All Forum Posts by: John Bowens

Teahjsia, I think you are in the right place to network and learn from other investors that have walked the same path. I just attended the Bigger Pockets Conference and I discovered there were many books you can obtain through the Bigger Pockets website that might help you in your journey. Also, these forums seem to be a great place as well. 

When attending the various sessions, I learned many individuals started their journey with house hacking. Not something I have experience with, but I know there are a lot of resources out there and I have heard many success stories. 

Hopefully this encouragement helps, but welcome to the community, lots of a really smart and great people here. 

And of course, do your due diligence, research, trust but verify! 

I find most don't know how many pennies on every dollar earned they are paying in taxes, including Fed, State, Local, NIIT, Medicare Surtax, Medicare Tax, SS Tax. 

I find so many incredible business owners and entrepreneurs out there are really good at making money, contributing to their community, creating jobs, etc., but then don't have time or brain power left to focus on taxes. I'm not a CPA, EA, or tax professional, but I appreciate the time and years it takes to practice in this space and I'm a firm believer in paying for good tax advice! 

That is very unfortunate to hear they don't match and makes sense why you are considering not contributing. Here are some pros and cons to help you. Your decisions might also be based on how long you plan on staying at that employer. If it is only lets say 2-3 years, at least you know you can roll out your money in 2-3 years when you leave, opposed to maybe many years into the future. Here are some pros and cons to try and help you: 

PROS: 

1) Despite no match, you are still contributing to a 401k, which carries unique tax-advantages (Tax-deferred or in the case of Roth, tax-free growth). Keep in mind, there are contribution limits every year, so the more you can contribute the better in most cases. 

2) You can max out your 401k contribution and IRA contribution every year, providing you have enough earned income. When under the age of 50, for 2024, you can contribute $7,000 when under the age of 50, and $8,000 when 50+ to an IRA. Then 401k, $23,000 when under 50 and $30,500 when 50+. If you want tax-deductions now you might contribute to the pre-tax bucket and get a deductions, or if you want tax-free growth and tax-free distributions, you will look at contributing to Roth bucket, or maybe you do some to pre-tax and some to post tax Roth.

3) Simply put, Compounding Interest In the Absence of Taxation! Very powerful! 

4) 401ks have unique creditor protections and probate avoidance. 

CONS: 

1) You will be limited with investing options in 401k, likely only to Mutual Funds, not real estate, etc. 

2) You can't move your money while still working. Although if really needed, you could borrow against 401k, up to $50,000, not to exceed 50% of balance. 

3) You have less money in your bank account for real estate, and instead held in a retirement account that only allows for stock market based investments. 

There are always tradeoffs in the game of investing and tax strategy. That said, think about the long-term impacts of compounding interest in the absence of taxation! 

Great question Ben and very common. How to use a smaller amount of funds in a retirement account to invest in real estate? First, the 401k funds must be from previous employers so you are eligible to rollover to a Self-Directed IRA. Let's use the balance of $9,000. You might consider (Check with your tax professional) to convert any pre-tax funds, to a Roth IRA. This is known as a Roth Conversion. Reason being, you can pay taxes on the smaller seed so you never pay taxes again on profits or distributions during your retirement.

Now, onto how to use these funds? If you can find real estate opportunities and money partners, you can potentially put these funds to use, tax-free in a Roth IRA. Think real estate joint venture. Please note, you can't do this with your non-IRA money, your businesses, trusts, children, grand children, spouse, parents, or grand parents. See IRC 4975 who are disqualified persons. This strategy can only be done with a non-disqualified person.

Example: I have a client who only had about $13,000 in his Roth IRA, found a fix-and-flip opportunity, and needed $105,000 all in, for purchase and rehab. He partnered in a joint venture with a financial money partner for the full balance needed. They negotiated a 50/50 split of the net profits. The $13,000 Roth, grew to $47,000 tax-free after the sale of the property ($34,000 tax-free). Caveat: Rule of thumb is to not do more than 1-2 of these short-term transactions, otherwise, you could trigger UBIT.

Or you consider slow and steady options, such as partnering your IRA funds with other money sources. For example, I have a client recently that partnered his HSA at 4%, Roth at 80% and Trad account at 16% on a $193,000 loan. He is charging 14%, which is being split 4%/80%/16%.

Hopefully this helps you with some ideas and concepts. 

Brad, 

I don't have any affiliation with the following, but I have been involved in the SDIRA industry for nearly 20 years, here are some ideas: 

1) North American Savings Bank IRAlending.com (buy-and-hold) 

2) First Western Federal Savings (buy-and-hold) 

3) RCN Capital (Fix-and-flip, or BRRR)

4) Cogo Capital (Fix-and-flip, or BRRR)

I know there are many others of you shop around. The key is that you ask if they will not require a personal guarantee. IRC 4975(C)(1)(B) describes a personal guarantee (extension of credit) between the plan and a disqualified person as a prohibited transaction. Now if you are invested as an LP with your IRA in an LLC and the GP is signing the personally guarantee, that is fine, as you the guarantor is not a disqualified person. Assuming GP is not you, your management LLC, child, parent, or other disqualified persons per IRC 4975.

Lastly, just keep in mind when your IRA takes on debt, you will need to understand Unrelated Business Income Tax (UBIT). This is not a bad tax, but just something to understand. For example, if you purchase a property for 100k, borrowing 50k. At 50% leverage, you will pay tax on 50% of the net profit. With depreciation you might show a loss, so keep in mind the same tax rules that apply outside of IRA, often apply inside the IRA when taking on debt.

Hopefully this helps for now Brad.

Quote from @Shahin Ahmadpour:

Hi, 

I am looking to connect with private money lenders. I am specifically looking for people who have a 401k, savings, home equity, in which they allow people to borrow money from them and they receive a return on it. Not an actual lender but a person who has funds and wants to make money from loaning out those funds. I was using OPM such as home equity or someone's HELOC to purchase real estate and paid the monthly payment on that plus interest to the person lending the money. That particular person cannot help me anymore as they have a child on the way and are working on home renovations. That being said, I am looking for a new contact.

Thanks,

Shahin

As a starter, might be helpful to have some educational material you can show them so they understand that yes, it is possible to lend money from an IRA/401k. If you go to youtube and search Equity Trust Company Private Lending, you will find a series of explainer videos that you can look at sharing.

I find many people are not familiar with the fact that they can self-direct their IRA or 401k funds into real estate secured loans. 

Hope this helps for now. Thanks! 

Quote from @Kevin Sobilo:

I'm just looking forward to the future when I may wish to invest in a syndication through a Roth IRA.

Correct me if I'm wrong but since the Roth IRA has no tax liability, the depreciation deduction is basically lost.

I'm curious, is there a way in a syndication to shift that depreciation that is of no use to me to another partner who can take advantage of it? If so, is there a way to get some compensation for giving them this depreciation? 

Great question. When using a Roth IRA, your Roth IRA is a tax-exempt entity, therefore, any depreciation deductions that pass through the LLC, can't be used on your personal tax return. In other words, the IRS will not allow you to take advantage of double tax benefits.

Now, you should be aware that when your Roth IRA invests in a real estate syndication, although the Roth IRA grows tax-free, there is a special tax called Unrelated Business Income Tax (UBIT). In the context of debt financed real estate investments, you will also hear this referred to as Unrelated Debt Financed Income Tax. Example, lets say your Roth IRA purchases a property for 100k, with a 50k down payment from the Roth IRA and a loan for 50k. Your debt % is 50%, therefore, 50% of the net income (income after expenses, including depreciation), would be subject to UBIT. Now, you should not fear this, but rather just understand it. In some cases, folks recognize losses that they can carry forward to offset future gains. Now, in the case of investing in a real estate syndication, your Roth IRA will be a Limited Partner (LP) in the LLC structure. Most likely the real estate will have debt, therefore, the income that passes through, NET of expenses and depreciation will be subject to UBIT. Eventually when the property sells, you will have long-term UBIT, which is about 20%, and remember the carry forward loss capability. You will file a 990-T and there are plenty of services out there to help with this.

Hope this response helps! 

Quote from @Dominik Makaneole:

Aloha All, Looking for Tax specialist or investors who have experience with rolling over a 401K into investment properties.

My situation: 1) I have a military retirement so I'll always have something to eat and medical insurance.  2)  My wife and I have 8 rental units which all cashflow in the Hawaii market which sees higher rents and equity every year.  We are not at what the IRS considers retirement age.  We both are planning on changing jobs soon and our 401K's could pay off 4 rental units.  Our 401K's produce 10% a year.  Rents in Hawaii have climbed 22%-29%+ in 5 years. Average sale prices up 45% from last year.  

My wife and I have been land rich cash poor for many years because of our strategy to acquire property in an area with a high barrier of entry.  We are looking to minimize the risk of hurricanes, etc. by getting these mortgages paid off ASAP.  Our 401K should jump start the snow ball affect in paying off these loans.  Also, we want to enjoy life more now that we have young grandchildren.

Thank you for any advice you all can offer,  

Dominik Makaneole

 Dominik, this is a common analysis individuals will go through as they develop their rental property portfolios. A few things to consider as you conduct this analysis. I can't say whether you should, or shouldn't, but hopefully the following will help provide some direction: 
1) You are likely already aware, if you distribute funds from your 401(k), early (prior to 59.5 years of age), you will incur a 10% penalty and ordinary income taxes on the amount distributed. The amount you distribute is added to your overall ordinary income, so you need to analyze how that holistically effects your tax situation. 

2) 401k/TSP funds often carry additional outside creditor protection, meaning if you had a judgement against you, an ERISA governed 401k can carry additional protections from creditors being able to get access.

3) Your 401k, whether pre-tax (tax-deferred) or even better (Roth after-tax) has strong tax-advantages. Think compounding interest in the absence of taxation. 

4) At some point you can look at self-directing those funds into real estate and other assets, that could potentially generate a better return then when you stated you are making. Ultimately, putting you in more control. 

All said, makes sense to analyze from from a cost/benefit analysis perspective to make the best decision. As someone that is passionate about retirement savings account, I always lean to not distributing funds from retirement plans.

Quote from @Gino Barbaro:

@Tanya Maslach

There are tax implications, and a penalty. I would take a look at Self directed IRAs. We use https://www.advantaira.com/

I ended up taking all the funds from my IRA accounts, paid the 10% penalty, and with Cost Seg and Real Estate Pro status, was able to avoid paying taxes. Not a wise thing to do for everyone, but for me, it was the thing I could have done. I had access to my money for an amazing deal, and I was out of the IRA system. It may have been different if it was a Roth IRA.

I would also consult your CPA for his advice

Best

Gino 

You are not alone, I hear this all the time. I always tell folks not to beat themselves up, we don’t know what we don’t know. Appreciate your comments Gino and nice to meet you on this forum. 

I personally like to look at every investment opportunity for the viability of the investment and then determine if better for Self-Directed IRA/401k, or if better for non-IRA funds. Not every deal is right for an IRA. 

Hope to be able to help anyone I can. Thanks! 

Quote from @Brian Carmichael:

Why don't I purchase a house under my LLC then overtime sell it to my personal retirement IRA at a discounted rate. Or if that's not allowed sell it to a friend who will then sell it to my personal IRA at a discounted rate so when I turn 65 and sell the properties , I don't have to pay any tax on all of my properties assuming I don't sell them until they are in my IRA account…

It was already mentioned, but to reiterate, it would be considered an IRC 4975 prohibited transaction if you were to attempt to take a property you own, or you own in an LLC and sell to your IRA. That said, if you have enough funds in an IRA now, you might consider purchasing entire property now in an IRA. I can't give financial or tax advice, but you might also consider Roth IRA savings. You could look into converting pre-tax money into a Roth IRA, purchase real estate and then all income and profits from sale, are tax-free in Roth IRA. No long-term capital gains tax, no recaptured depreciation.

Just a few things to start to chew on, hopefully this was helpful.