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Rolling over an old 401K into real estate

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James Zachary

Northern, California

Feb 05 '13, 11:12 AM


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!



Hans Helmuth

Littleton, Colorado

Feb 05 '13, 12:28 PM


I've been using American Pension Services in Riverton, UT. I am very well pleased with them.



Jeff S

Real Estate Lender from Los Angeles, California

Feb 05 '13, 01:12 PM
1 vote


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



Eric Ray

Real Estate Agent from Shawnee, Kansas

Feb 05 '13, 01:44 PM


We have some experience in helping people with this once it's a self directed IRA. The websites posted by Jeff are a great resource.


Edited Feb 7 2013, 18:24 by Moderator


Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 05 '13, 11:55 PM


@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



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 06 '13, 12:00 AM


Forgot to link this http://www.entrepreneur.com/article/207190#



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Mike H.

Real Estate Investor from Manteno, Illinois

Feb 06 '13, 12:25 PM


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.



James Zachary

Northern, California

Feb 06 '13, 02:06 PM


@Mike H.
You bring up a very interesting point and it is something I have been bouncing around in my head. From what I have read on the web, most people advise against taking money out of your 401K. I must admit, I haven’t dove to deep into the reasons why but I will now. Thanks. Oh, one more question… Where do you find houses with $450 net income?!?! :-)



Will Barnard Moderator Donor

Real Estate Investor from Santa Clarita, California

Feb 06 '13, 02:33 PM
2 votes


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.



Medium_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


John Blackman Verified

Real Estate Investor from Austin, Texas

Feb 06 '13, 02:51 PM


I use IRAServices as linked above. They are very hands off. Once you have it all set up, you're ready to get to work.

You do have to be careful with the tax implications of using SDIRA money as well as borrowing with an entity that receives funds from an SDIRA. IE, better not to do it.

I've also heard good things about solo 401ks but don't have one. I'm not too keep to switch as my SDIRA is working for me for flip projects that I use the capital for. I don't use the capital for any buy and hold, it's all flip projects.



Medium_inner10_logo__updated_John Blackman, Inner 10 Capital
E-Mail: [email protected]
Website: http://tinyurl.com/inner10cap
Our Recent Austin Business Journal Article - http://tinyurl.com/Inner10Capital


Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 06 '13, 04:00 PM
1 vote


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



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Chris Weiler

Real Estate Investor from Anaheim, California

Feb 06 '13, 04:39 PM
2 votes


I will throw my vote in for the Roth 401K option as well. I took the plunge last year and converted over to a Roth 401k (with Steven Hamilton's help, thank you Steven!). In addition to the benefits described by Will Barnard, with a 401K you don't have to deal with a custodian and you can often use leverage without taxation (UBIT).

As stated before, you will need a business to be able to open a self-directed 401K. But, it does not need to be an Inc. or LLC. Anyone can create a simple sole-proprietorship, open a bank account and use it to start a 401k.



Will Barnard Moderator Donor

Real Estate Investor from Santa Clarita, California

Feb 06 '13, 09:39 PM


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.



Medium_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 06 '13, 09:51 PM


@Will Barnard maybe for once was a bit of an exaggeration. Usually we tend to have slightly differing viewpoints.

-Steven



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Will Barnard Moderator Donor

Real Estate Investor from Santa Clarita, California

Feb 06 '13, 09:56 PM
1 vote


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.



Medium_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Jeff S

Real Estate Lender from Los Angeles, California

Feb 07 '13, 06:10 PM


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'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.

Well, we finally disagree Steven Hamilton II, but only slightly. Taking the tax hit and rolling into a Roth is not necessarily a good idea. This is going to depend on age of the investor and tax bracket. In general, the older you are and the higher your tax bracket, the less a Roth rollover is in your interest. It really requires an analysis to determine how fast you can grow what's left after taking the hit.

I’m always amazed over the arguments against investing tax deferred (or even better, tax free in a Roth!!) over the long term. These never seem to consider the immense power of compounding and the time value of money.

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.

Jeff



Will Barnard Moderator Donor

Real Estate Investor from Santa Clarita, California

Feb 07 '13, 06:25 PM


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!



Medium_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


James Zachary

Northern, California

Feb 07 '13, 07:17 PM


Man, I am so happy I joined BP. You all are amazing! Thank you so much for all your suggestions and comments. Just to recap, it sounds like most of you advise against using a 401K (Solo or Self Directed) to purchase real estate because you lose some of the tax benefits that are already built into Real Estate. Very valid points, however, if an older 401K (from a previous employer) is enough to get you started now in REI, would you do it? Or would you try to find other ways to build funds, even if it meant sitting out for 6 or so months?



Jeff S

Real Estate Lender from Los Angeles, California

Feb 07 '13, 11:17 PM


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



William Bannister

Commercial Landlord from Oshkosh, Wisconsin

Feb 08 '13, 01:18 AM


What makes me nervous about 401k's are that who know's if congress gets greedy and goes to the moon with taxes on these regulated retirement plans. I just hate having my capital tied up in it. It doesnt even feel like mine especially when they are in trouble.
When I had a 401k I toke the hit:( Ya I probably shoulda put it into a roth but I didnt. I did use the 401k money to buy more income property when I left my earned income and transitioned to living on my income properties. In my defense it was less then 20k.
I like retirement income like the next guy but i also like liquidity and real estate is illiquid enough without putting more regulation onto it.
So here is my question? If we dont work a job anymore and are a long ways from retirement and we view our equity in our income property as retirement money as well why should it be in a plan of any type since its just tied up further by gov rules?
For example if I have a 3 million dollar complex and I get 10k a month off of it what benefit is there to keep some of that money tied up when I want access to all of it?
I mean to have the gov tell me I have to keep my dirty hands off my money. I can co mingle, I cant do this, I cant do that...
@#$% Uncle Sam he can keep his defined pensions and his 401k's and other various toilet paper they come up with to screw up an average guy. I know you grow tax free and all that but in my defense I can move my money without being tied into something. Taxes ya I know Il pay that or i could just keep the apt building to my death and let my son pay taxes instead. On my flips Im screwed having to pay fat taxes. Maybe what I need to do is strictly income and quit flipping so I dont get taxed to death.



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