Retirement funds to purchase an investment property

12 Replies

Hi all,

I am about to change jobs and will be purchasing an investment property once my vehicle is paid off in 2016. I emailed my HR person to obtain a Terms of Withdrawal to review if my next employer will allow for loans. I am aware of the basics where I can take a loan up to 50% of the vested balance with a maximum of $50,000. I was looking to do a loan for $30K. 

My question is, what other options are out there for me to purchase an investment property? I've read about self-directed IRA's, but I wanted some feedback here to see if that is a legitimate option.

Thank you sirs. 

@Kevin Parnella  

If you are changing jobs, you will have the option to rollover your current 401k either to a new employer 401k or an IRA in your own name.

If you roll to a 401k, you can borrow from the plan as you note. Anything you do with the funds will be as if you did so with cash out of your own pocket, and will be taxed accordingly.  There are no penalties for taking the 401k loan, but you will not only pay back the loan with interest, you will also be replacing the pre-tax dollars you borrowed from the plan with post-tax dollars out of your pocket.  Thus the interest rate is essentially your tax rate + the 4-6% most 401k loans cost.

A self directed IRA is absolutely a viable option. These programs have been around just as long as "regular" IRA's - i.e. what Wall Street wants you to think is the only type of IRA. The tax rules have always allowed for alternative assets such as real estate, stock of privately held companies, etc.

With a self directed IRA, it is not "you investing in real estate with IRA money", but rather "a different way of investing your tax-sheltered retirement plan". All investments must be entirely at arm's length with the only purpose of growing your retirement savings. You cannot utilize the proceeds (or the plan held properties) personally, nor can you "add value" to the IRA through the provision of goods or services (i.e. sweat equity). You essentially get to be your own fund manager.

It is a very different game with different outcomes, but can be a fantastic way to build wealth for your retirement future.

There is a lot of info here on BP on the topic to get you started. The best way to learn what your options are is to speak with one or more of the self directed IRA specialist who participate here at BP.

I think it's a great idea personally, to use the money now here is my own personal philosophy I have a TSP account been at job for 5 YRS only have 25G in account another 5 yrs will have about 60 I plan on retiring from job and pursue real estate full time, In my area I can buy a property for 30G, I am only 38 I'll be 43 but won't be able to collect until I'm 59 1/2 and they will probably send me about 200 a mth if I cash out with taxes fee's and penalties I will probably get about half that 30G gets me 200$ a mth cash flow now rather than waiting 20yrs. A lot ofun people will say no but I say go for it.

I have a self directed 401k that we use for our investing. It's less known than SD IRA, but it's worked well for us. Good luck.

as Brian stated, upon leaving, convert the entire 401k into a SDIRA and have access to invest all of the funds. 

A self directed IRA is the way to go- there are also non recourse loans you can use to leverage your monies- I converted all of mu SDIRA portfolio into properties and am loving it! good luck

Look at the real estate investing as adding to that portfolio.  Leave the investment alone and save up cash to make a down payment on a rental.  That will be adding to your investment diversification instead of taking away from it.  

@Kevin Parnella  

I agree with the comments above that rolling over your 401k from the past employer into an IRA (or possibly self-directed IRA) will give you more freedom and control.

Thanks men. I now have a complete understanding of the 401K loan option, and I would not do a withdrawal. What I would like to know more about is the self directed IRA option. With the 401K option, i would have a 5 year re-payment. One downside of the 401K option,

With the SDIRA, I thought I read where i have to have a custodian? I don't understand this concept or what that means. Second, if I rolled over all of my 401K from my previous company into a SDIRA, are there tax implications for a withdrawal or loan? I would like to find out why many of you feel the SRIRA is a better option versus a 401K loan. 

thanks men!

@Kevin Parnella  

there are no tax implications when you move funds from one qualified retirement plan into another qualified retirement plan (401k to IRA).

Loan option is NOT available with an IRA.

One of the reasons SDIRA is good option is because you will be able to grow your wealth on tax-deferred basis. 

Originally posted by @Kevin Parnella :

Thanks men. I now have a complete understanding of the 401K loan option, and I would not do a withdrawal. What I would like to know more about is the self directed IRA option. With the 401K option, i would have a 5 year re-payment. One downside of the 401K option,

With the SDIRA, I thought I read where i have to have a custodian? I don't understand this concept or what that means. Second, if I rolled over all of my 401K from my previous company into a SDIRA, are there tax implications for a withdrawal or loan? I would like to find out why many of you feel the SRIRA is a better option versus a 401K loan. 

thanks men!

 Hey Kevin, 

I think I can help, I work for Provident Trust Group, which is an self-directed IRA/401k custodian. I think there has been some confusion in terms of which avenue is better. I can't give you a recommendation based on your situation because, I just don't know enough about your situation, but in general terms different options fit different people.

If you want to invest in one or two buy and hold properties and you simply want to use those as an asset to diversify your retirement portfolio, a self-directed IRA is probably the route you would want to go.

If you own your own business, or some time of business entity, you may want to set up a solo 401k. This essentially combines the freedom of a self directed IRA with the benefits of plan provisions of a 401k. A solo 401k is available as an employer plan if your business has 2 or less employees (you and your spouse.) While most people find they wont generate enough income from this business to qualify to make any type of meaningful contributions, it would allow you to administer your own 401k plan, invest in alternative assets like real estate, and take loans from the plan, etc.

If you want to invest in tax liens/deeds, or auction properties, or anything with a time sensitive nature, or fix and flips, rehabs, or anything where you will be making a lot of transactions, you might want to look at a SD IRA LLC option. Essentially this model puts an LLC between your SD IRA and the investments, the major benefit of this is what you see advertised as "Checkbook Control" which is a simple way of saying you control the LLC which invests in assets, so you have a checkbook possibly debit card, and whatever other products your bank account comes with. This eliminates almost all fees from your custodian. I.E a custodian will charge you to send a check or wire out, if you're paying those bills out of your LLC checking account, you eliminate the transaction fees from your custodian.

As far as the custodian. It's a really simple concept that the IRS makes very difficult to understand. The IRS mandates you have a custodian for all IRA accounts. It doesn't matter if you have stocks and MFs or gold bullion, you must have a custodian. The reasoning behind that is, the IRS wants to make sure that you don't have direct control of money you "shouldn't" be using until your 59 1/2, without someone to alert them when you use it. So basically the IRS mandates you have a custodian to control the funds and report when they are used on forms like 1099R and 5498 so they can make sure you aren't abusing the tax free nature of the account. Here's a simple analogy.

Imagine putting a toy in front of the Christmas tree in august, and telling a child not to play with it until Christmas and then leaving the child with no one to supervise. You would expect the child to break the rules, and so you would leave someone to supervise. Essentially the IRS thinks we are children, and they make a custodian snitch on you if you try to play with your toys before Christmas.

Hopefully that makes sense. If you have any questions let me know, I'm always happy to help.

Adam

www.trustprovident.com

Following IRS website has good information regarding the solo 401k loan rules including information about the IRA loan restriction.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans

@Kevin Parnella I'm not giving advice but last October I had a similar choice to make.  A former employer offered me 45K or $210 a month starting now (I'm 50) instead of waiting until at least 55 to start collecting the full value which was about $700 at age 62, I think.

I took the 45K which was about 27K after taxes and penalties. My plan to buy two houses with the money. I bought one house for 9K out of pocket (85% LTV but the bank accepted the appraisal which was higher than the purchase price), and I'm looking for the second one. The cash flow on the two will be about $1000 a month minus repairs, vacancy, etc. I have purchased another one in December but since it was a no money down deal, I'm not counting that one. I have done this before and love the idea of turning a pile of money I couldn't really control into cash flow. I expect to be tarred and feathered for even mentioning this concept but it works for me. Food for thought. It depends on your goals. Good Luck.

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