How to Invest in Real Estate Using Retirement Accounts
Have you thought about taking a more active role with the funds in your retirement accounts? Has the current stock market volatility got you wanting to change things? I’m writing this blog post to let you know there are alternatives, unique options for you to take back control. I’ll be discussing self-directed retirement accounts such as ROTH/Traditional IRA, 401(k) or a Self-Directed IRA LLC. The term “self-directed” simply means that it puts you in control of the bank account, however, you cannot touch any funds that come in and out of that account. For our purposes here we will discuss self-directed retirement accounts to invest in real estate, which allows you to invest in what you want, when you want and how you want.
The process of setting up these accounts is pretty simple there are many third parties that can assist with this. The setup process for both ROTH/traditional IRA is pretty straight forward and funds from another IRA can be rolled over into it. One drawback with these ROTH/Traditional accounts is when it comes to selling the real estate you hold with these funds: you maybe hit by UBIT (Unrelated Business Income Tax). It essentially taxes you up to 37% on part of the deal that’s leveraged. Here is a podcast that outlines UBIT how to avoid it.
An ideal way of avoiding UBIT would be to setup a Solo 401(k). One caveat to note is that you need to have the presence of self-employment business activity. Another caveat is that and you and your spouse can be the only fulltime or part-time W-2 employees. Funds can also be rolled over non-taxed, from another retirement account of various types. If you want to rollover from an active 401(k) with your current employer, you would just need make sure the plan allows for in-service distributions. You can also keep your employer 401(k) and contribute to a new solo 401(k). Another great benefit is that the yearly contribution limit is 57k. I just recently set up my self-directed solo 401(k) at RocketDollar. I set it up to invest in a colleague’s syndication deal since I cannot invest into my own deal. The only thing I would recommend is to allow for 6-8 weeks if you are rolling over from another existing plan. Otherwise if you are contributing with new funds the setup takes about a week.
If you do not have self-employment business activity or have other full-time employees, you can setup a Self-directed IRA LLC through Freedom IRA. Essentially, this acts similar to the solo 401(k). It does have higher fees since an LLC is setup for this purpose. In general, fees for either retirement account is very low due to fact that there are no intermediaries or asset management fees. For example, with Rocket Dollar I paid $275 as a one-time setup fee with a $15/month maintenance fee.
Lastly, if you do setup one these retirement accounts and invest in an apartment deal the funds for acquisition need to come directly from this account. Additionally, any cashflows or profits need to go directly back into this account as to not trigger any tax liabilities. The retirement account will be the owner of the portion of the real estate and you would act as trustee of account that has full control to wire funds or take other actions. Ultimately, these tools are great mechanisms to save for retirement, to use as another funding source for real estate investments or as a tax shelter for some of your income.
The author highly recommends you consult with your advisors, including your attorney and accountant, about any plans you may have or are considering and that you get their professional opinion and advice before taking any action.