Traditional IRA or mutual/index funds first?

Question

Let's say one has savings in both their traditional IRA and mutual/index funds. Which one should they tap into first to fund their investment properties?

Matt Devincenzo · Answer

That is a VERY broad generalization and has some large inaccuracies.

A self directed IRA can be either a traditional(non Roth) or a Roth. Traditional IRAs refer to the structure not the custodial nature.

Most  IRAs can be invested in real estate, the custodians(the institution that services your acct) limit whether or not they offer the ability. So a traditional IRA at a self directed custodian can in fact invest in real estate.

Not all self directed IRAs have checkbook control, again depends on the custodian.

The question now should be are you trying to invest for retirement only or are you trying to invest for today. If it's for retirement only then maybe a self directed acct is the way to go.

If you need to invest for today then obviously SD might not be what you're looking for since you will be wanting to go ahead and take the penalties today to reinvest that money into RE.

As far as if you raid an acct for RE which one? You need to talk to your CPA to figure out what you tax obligations will be for either course, but I would say probably the index funds since I'm assuming any penalties for the IRA funds will be MUCH higher than taking out of your index fund.

(Disclaimer:No tax or legal advice)

Account Closed · Answer

If you have funds outside an IRA use those first for rentals. You can deduct depreciation, mortgage interest, and expenses.  So your effective tax on the income will be reduced anyway. You can use the IRA funds for notes or other high yielding passive investments that would be taxes at high rates in a taxable account.

Linda S. · Answer

Thank you all for a great discussion :)

Jon Holdman · Answer

I had this discussion with Fidelity before opening an account with Sterling Trust.  "Yes, you account is self directed" the rep said.  "OK, how do I send in the private placement paperwork?"  "Uh, you can't do that".

Kirk Chisholm · Answer

Matt Devincenzo There is no legal meaning for "self directed" IRA. all IRAs are self directed. That is the point of an IRA. What the custodian allows you to invest in is another issue altogether.

What you are referring to is a term which many of the broker dealers (who focus on traditional securities) use to articulate that an individual can control his/her IRA (compared to their 401k I imagine). Many others (such as yourself in this case) use the term to define an IRA held a custodian which can handle alternative assets such as real estate, tax liens, etc. I have yet to find a custodian which does both well, but both types of custodians claim to offer the title "self directed IRA".  There is no formal or legal definition. It can mean what you want it to mean.

If you watch most fidelity commercials they mention self directed IRA frequently.

Matt Devincenzo · Answer

Jon Holdman I've never heard a "normal" provider mention their product as self directed, so if that is the case then I stand corrected.

I guess the appropriate qualification would have been, there is a difference between an acct that allows RE and other less conventional assets that is popularly termed "self directed", and the more conventional option which allows self direction in the plans/funds they provide.

Jon Holdman · Answer

Matt Devincenzo if you ask Fidelity or Vangard if they offer self directed IRAs they will almost certainly answer "yes".  Self directed just means you get to choose the investments.  But they will limit you and you won't be able to buy real estate or make or originate a note.  Its still a self directed IRA.  That team has no specific legal, IRS or DOL meaning.  A few custodians allow investments in real estate and other non-traditional investments.  That are, I'm sure, what you mean by a self directed IRA.

John Thedford · Answer

I like this advice! I have a local friend that buys investment property outside his retirement accounts. He convinced me to do the same. As far as where to put your retirement account funds, I used a self directed 401K called a Solo 401K and use those funds to do hard money lending. So far, so good..even with a few hiccups.

Matt Devincenzo · Answer

Kirk Chisholm I'm going to have to disagree here. While every IRA is the same in that they follow the same rules and have the ability to invest in the same assets, a self directed acct is unique.

A self directed acct is specifically an IRA acct that is with a custodian that allows you to make the decisions as to what you invest in within the confines of allowable investments per the IRS. Most institutions only allow you to invest in the products they offer which often don't include items like RE and say precious metals. Also some SD accts are set up where there is checkbook control effectively allowing you to manage your account with no middleman to slow down the process...or protect you from making an error and disqualifying the entire acct.

So a SD acct is definitely not the same as a "normal" IRA though they do have the same rules to follow from the IRS they are not all self directed.

Jon Holdman · Answer

By investment properties I assume you mean rentals.  Rentals already have pretty good tax treatment.  So, I'd recommend using after tax money for rentals.  Investing directly in rentals inside an IRA has several downsides.  A big one is that you can end up actually paying taxes inside the IRA and then taxes again when you take the money out.  I believe notes are a better investing inside an IRA than actual property.

Traditional IRA or mutual/index funds first?

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