A lot of people are burned out on the stock market and want to invest in real estate or small businesses or private funds can use a self-directed IRA.

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Can you Invest in Real Estate with a 401(k) or IRA?

On the Real Estate Investor Podcast, we recently invterviewd Mat Sorensen about raising money for real estate with a self-directed IRA (SDIRA). Mat is the bestselling author of, The Self-Directed IRA Handbook, that has sold over 40,000 copies. The CEO of Directed IRA, Mat led the trust company to one billion assets under administration in three years. Mat uses IRAs and 401(k)s to invest in real estate and other alternative assets. A lot of people are burned out on the stock market or have way too much in the stock market and want to invest in real estate or small businesses or private funds can use a self-directed IRA.

Besides leaving a job, is there any other way to untap money locked in a 401(k) or IRA their account?

If you’re already in an IRA now or you’ve already rolled over to an IRA or you’re a TD Ameritrade or Fidelity, you can self-direct and invest in real estate. The first step is to leave Fidelity or TD Ameritrade because they are not allowed to invest in real estate or alternative assets.  Next you need to move your IRA over to a custodian-like directed IRA, where you are allowd to invest in real estate or a private fund, etc.

The 401(k)s are where it’s a little “clunky”.  If it’s an old employer 401(k) you can always move that money, however if you are at it is current employer 401 (k), you cannot roll it over to a SDIRA until 59.5 years of age.

Now, if you think of Meredith or Creed in the show, over 59 and a half. Hopefully, you’ve seen this show, The Office. For those listening, you’re following me here, but you work at Dunder Mifflin. They got the Dunder Mifflin 401(k), right? They went to Toby, they enrolled in the 401(k) but they’re over 59 and a half. Even though they still work there, they can roll the money out. So they can roll the money out to an IRA wherever they want.

Are there any drawbacks to be aware of?

Matt says, “Yeah. I mean, I think there’s always two issues to look at and that is, UDFI that you mentioned and then primitive transactions. If you’re investing your money into other people’s private deals or funds, you don’t need to worry about primitive transactions but some clients of ours are like, the deal maker themselves and they want to use their IRA in it and it’s like, “All right, I got this property that I’ve been rehabbing in my own company and I want my IRA to buy it as a rental.”

Well, that doesn’t work, or “I want my IRA to buy this property and then, my construction company’s going to come do the rehab.” That doesn’t work. The IRS has certain rules that restrict you personally from transacting with your IRA. They just don’t trust you from buying or selling or transacting money back and forth with you personally or your own companies in your IRA.  That includes your spouse, your kids, the parents, they’re on this kind of like, prohibited restricted list. So for some people that are kind of doing deals themselves with their IRA, not investing in someone else’s funded deals, they need to know the primitive transaction rules.

If you are investing in a fund let’s say and that is very common, one of the most common investments, someone investing in a private real estate fund for example, the only thing you’ve got to worry about there is UBFI. It’s a version of UBIT where if there’s debt, there is a pass-through tax that happens on the debt. It is a very low rate, it is lower than what you pay tax on personally.

Even when the property sold it’s capital gain rates but it’s only on the percent of the debt involved, so it is lower than what you pay tax on personally but it is something to know and understand. Not something we can dig in fully here and I’d be nervous that someone careening off the side of the road if they are listening to this podcast in their car if I got into it but I got a chapter in my book on it.”

What Is a QRP or solo 401(k)?

The QRP is a solo 401(k), it’s designed for an employee only and where your owner-employee and you are basically doing a solo 401(k).  It’s a great strategy for anyone self-employed with no employees.  You can put over $60,00 a year into that rather in comparison to the $6,500 a year into an IRA.  One can also open up  a solo if they have a side hustle.

Mat adds “You are not paying self-employment tax on the income, so like rental income, let’s say you’re doing lending interest income or points, that’s all investment income on your tax return. They key being you’re not paying self-employment tax, which we love that, you know? That saves me 15.3% on that income, that’s why rental income is nice but it doesn’t qualify to set up a solo 401(k).  Now, we do sometimes, we call it a side door solo 401(k) strategy where – because sometimes we do have clients that have five, 10 rental properties. So they’ve got quite a big little investment portfolio and managing those properties in and of itself is a business and even if they got property managers, managing the property managers is business and so sometimes we set up a management company for them solely for the purpose to push a little income over to it.  They expense it from the rental properties, push them into a management company only to contribute and justify a solo 401(k). We never, I’d just say as a tax lawyer that’s where I’ve been by trade, never use a management company strategy like that unless you are trying to justify like a 401(k) but sometimes there’s a strategy to find a solo 401(k) for someone that does have quite a bit if real estate assets that they have to manage, so it’s an option.

To learn more go to https://directedira.com/

Full podcast: www.breakofdaycapital.com/podcasts

Watch on YouTube: https://youtu.be/PASNzH8-jcY

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