BiggerPockets

Does anybody have any advice on rolling over a 401K into long term real estate investments from a previous employer? I heard that it can be done but I'm having a tough time finding information about it on the interwebs. Thanks!

It's remarkably easy and done all the time, @James Zachary. The easiest way is to roll your 401k into a self-directed IRA. The basic rules are simple though enforcement is strict. You can begin by searching this board for "self-directed IRA" and also by visiting the web site of a few of the bigger self-directed companies show here:

http://www.pensco.com/
http://www.theentrustgroup.com/
http://www.trustetc.com/
https://www.iraservices.com/

There are many others and all have a pages that explain how investing through an IRA works, your investment options, as well as the rules. If you do some searches here, you read opinions and individual preferences among these companies, pro and con.

Lot's to read about and to learn but you're on the right track.

Jeff

@James Zachary,

Look into ROBS RollOver as Business Startup. You can go the self directed route; however, you can also use it to start a C-corporation and use it to invest.

-Steven

Why bother rolling it over? Just take it out and take the hit on the early withdrawal now. The advantages to doing that?
1) You get the cash flow now instead of having to wait til retirement - at which time you'll have to pay taxes on it when you pull it out.

2) You can leverage that money to buy more properties.

3) Real estate income is pretty much tax free anyway so what do you really gain by leaving it in a tax free vehicle that is only temporarily tax free - you'll pay when you end up pulling that real estate out of the 401k.

example with some VERY loose guestimates on the numbers:
100k buys you one house (worth about 130k) free and clear in your 401k. You net $800 a month for that house for the next 20 years. It appreciates and ends up being worth 250k plus you pocketed another 200k in net profits. You now have 450k in your 401k that you have to pay taxes on when you pull out so you're left with 340k?

Same example: Take your 100k out of your 401k now, you end up with 60k. Buy two 100k houses with leverage putting down 30k on each. You net $450 per month on each house (total $900/mo net income) that you get to put in your pocket today tax free.

At the end of the 20 years, you have both houses paid off and they're worth 500k total. You then sell those and only get hit with a capital gain tax instead of earned income bracket and you put 400k in the bank. Plus you will have pocketed roughly 11k a year for the past 20 years (another 220k).

So I just don't see why people wouldn't pull their money out of their 401k and take the hit now. The benefits of doing it today provided you use it to buy real estate are far better than keeping it in.

401k - 1 100k house free and clear. Your net retirement nest egg from that investment would be roughly 340k in cash.

Pull the same 100k house and use it and leverage to buy two of the same house types as above and you end up with 400k in cash when you sell the houses. Plus another 220k in cash (almost all of which was tax free) from the rental income.

340k for option 1 (buying with 401k)
620k for option 2 (pulling money out and taking penalty)

This obviously has some flaws in the math. One is that rental income would be greater over the 20 year period. Assumes appreciation of the value of the house almost doubling in 20 years. Thats historically correct but who knows if that will be true.

You can argue some of the numbers maybe should be adjusted a bit here or there. But there's no way you can tell me the numbers for option 1 can ever come out better than option 2.

Mike has some valid points, though I do not agree with taking it out to cash and paying both the tax AND the PENALTY (additional 10%).

Also, I do not agree with others on rolling over to an IRA (unless that is your only option) but rather, rolling into a solo 401k plan which is a self administered 401k plan requiring you to have your own business without any employees other than you and a spouse (or multiple spouses if you live in Utah - J/K) :)

Advantages of 401k over IRA is ability to place more in each year (contributions that is), borrowing provisions (IRA's do not have them), and company matches to contributions.

If you were going to take it out and take the hit, i would only recomend doing so by rolling into a ROTH solo 401k plan. No 10% penalty, all future profits are tax free, and you retain all the benefits of the 401k over an IRA.

lastly, holding RE in a tax advantaged account (retirement plan) is not (in my opinon and that of many others) not the best use of the funds. More appropriate is to use the funds in a lender capacity. Buy and hold offers depreciation, leverage, and other advantages that are either lost or much more difficult in a retirement plan.
I have commented in many threads in full detail on this subject here on BP. Do a search for it here on BP.

It looks like for once @Will Barnard and I agree. I STRONGLY suggest going the Roth account route. I've been assisting man of my clients to roll over their traditional accounts to roth over several years or in the case of 2012 very quickly.

Tax free growth sounds better.

-Steven

Originally posted by Steven Hamilton II:
It looks like for once Will Barnard and I agree. I STRONGLY suggest going the Roth account route.

I would not go as far as to say that, we may disagree on a few things, but agree on many others including this thread.

To each his own. One of he great things about BP Nation community is the ability to get multiple view points.

Some things are a matter of opinion, others a matter of fact. When facts are wrong, someone will correct. When opinions are given, others can provide alternate ones.

Where I STRONGLY agree, is that hard real estate assets are best kept out of a retirement plan in favor of paper investments such as notes and lending, which are normally taxed as ordinary income. In addition to the obvious contribution limitations, the dangers of self-dealing, and general ease of "messing up," a self-directed retirement plan also eliminates the ability to take advantage of significant real estate benefits as depreciation and many business deductions.

Agreed.
As far as the debate over Roth rollover or not, you are also correct that in large part, it depends on age and income level of account holder. Older people have less years to save and thus, are already at (typically) the higher tax brackets and have less years to live through additional tax hikes (which we all know come every 4 years.

A younger person, it makes all the sense in the world to go ROTH right away!

It sounds like you have money burning a hole in your pocket, James :-).

The tax consequences noted above don't change because you currently have enough cash.

If you have enough money to buy a house now in a 401k, you have enough to loan on a house now in a 401k -- or, a few houses. That would be my preference (on short term flips). If it will only take you 6 months to reach a point where you can use your after tax income to purchase property, you could do that too. This would give you an opportunity to form some relationships and get the lay of the land.

You're not specific about your real estate interests, but in my view, you could shelter your RE profits before tax in the 401k and build a large passive note and loan portfolio. Understand, we loan money, so I'm obviously biased in that direction, but you seem to be in a good position, James. Good luck.

Jeff