Utilizing funds from my 401K and/or Roth IRA?

Question

Hello, I am trying to understand whether or not it's possible the use funds from a 401K and/or Roth IRA to invest in a local multifamily unit? If yes, how does it work, and what are the key considerations in deciding whether it's advisable to do that?

Thank you for your help,
Matt

Account Closed · Answer

Hi @Matt Ferch -- you'll need to convert your account into a Self-Directed 401k/IRA. From there you can specify real estate as your asset class. If you were to invest in a MFH, all of the expenses and income will need to flow into/out of your retirement account. You can think of it like index funds, where you get a dividend (monthly cash flow from rent) and also get an appreciating asset (e.g.. the stock value/home value increases). When you decide to sell, the profits would need to also go into your retirement account.

There are some restrictions on the actions you can take when you have a property in a self-directed account. For example, you can't sell the property to yourself or family member (I'm simplifying this rule, so reach out to a self-directed custodian to find out more details) and I think you cannot perform certain maintenance on the property.

A reasonable strategy (imo) that I've seen local investors do is get a property to flip in a self-directed account and then access the money from their retirement account after they sell it. Yes they will incur a penalty plus taxes, but this strategy is helpful if they really need capital and then want to deploy that capital via their personal account (not thru their retirement account).

Brian Eastman · Answer

@Matt Ferch

Yes an IRA or 401(k) may pursue the BRRR strategy.  The key thing to keep in mind is that the plan is the investor, not you.  So the plan will buy and rehab a property, get it rented, and then do a cash-out refinance so that the plan can then use that additional liquidity to acquire additional property.

In an IRA or 401(k), any debt instrument such as a mortgage must be non-recourse, meaning no personal guarantee from you.  Such loans are more conservative in nature, so expect a lower LTV on that cash-out re-fi than what you might receive on a personally guaranteed loan.

There is lots of good information here on Bigger Pockets on the topic of these types of self-directed retirement plans, as well as several professionals in the field who are active.  Do a touch of reading and then get on the phone and ask questions.  Working with an experienced provider of such plans will greatly shorten your learning curve as compared to browsing the web for hours on end.

Matt F. · Answer

Thank you Account Closed.  Would it be possible to BRRRR using a Self-Directed 401K/IRA? (Sorry if this is a dumb question, I'm in the learning process. Thank you.)

Account Closed · Answer

@Matt Ferch

Matt, you may lose the tax deductions but you don’t have to pay capital gains on real estate inside your self directed IRA either. I’ve made a lot of money with real estate in my self directed IRA. At the end of the day if your returns are better and less volatile using real estate than investing in the stock market there is nothing wrong doing it.

Sean Autry · Answer

@Matt Ferch- only trouble with buying real estate in your retirement plan is you lose a lot of the tax incentives both the real estate provides AND the retirement plan provides.

A lot of times rental real estate can be operated with a very low or non-existent tax bill, and the whole point of a 401(k) is to protect from taxes. So you’re buying an asset that doesn’t produce a lot of tax liability in a vehicle that protects against the taxes it doesn’t produce- and none of the liquidity can be accessed until retirement without a penalty.

I’m a bigger fan of note investing inside your retirement plan, and leaving the real estate outside of it.

Now, if your only opportunity to buy RE is inside of your retirement plan, then that’s a decision you need to make for yourself.  But if you can manage to acquire it by other means- I’d suggest doing that.

Donald SaintVal · Answer

@

Jovon Itwaru

Your real world practical example of the flip is gold. I have been exploring the self directed IRA option and I have had a little trouble understanding g how it would work practically if I wanted to do a flip.

Brian Eastman · Answer

@Matt Ferch

Your understanding is correct.  A self-directed IRA is still an IRA designed for tax-sheltered wealth accumulation for your use in future retirement - just with more investment choices.  Such plans are not a means to create "today" money.

Matt F. · Answer

@Sean Autry thank you, that’s helpful perspective!

Matt F. · Answer

@Brian Eastman thank you for your response, that's very helpful!  As I think about it, if my goal is to build passive income that allows me to step away from my 9-to-5 corporate job, the 401K/IRA funded approach wouldn't allow for that since the rental income stays inside the fund.  But if I wanted to grow my retirement accounts quicker/larger over time, then, perfect.

Utilizing funds from my 401K and/or Roth IRA?

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