401k to IRA for investment property

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401k to IRA for investment property

Gaston Barua
Investor · Palos Verdes Peninsula, CA · Member since 2015 · 41 posts · 6 votes

Hello BP!

I am highly excited because after going to my first REI meet up I learned about a new creative way to fund a down payment for my first investment property thanks to a fellow investor who does this for a living. He helps fellow investors leverage their 401k and transfer a portion of the funds into an IRA for investment purposes. I am currently looking into details about doing this through my company.

My questions are:  

has any one used this method to fund a deal? Whats the process like? What should I be cautious of? What was the biggest obstacle?

Thanks in advance. Happy investing! 

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Gaston Barua

One can invest IRA or 401k monies into real estate. Keep in mind, however, this is not you investing in real estate and getting to use IRA funds to do so. Rather, the IRA is investing in real estate instead of investing in, say, stocks. You can direct the investments yourself, but you cannot personally benefit in any way other than growing your retirement savings.

In my many years of experience in this field, I have found that some of the least reliable information on the topic comes from real estate gurus. They focus on getting you excited and opening up your financial resources to put into deals where they or their partners can earn a commission. We have to do a lot of "un-learning" with clients when they first learn about self directed IRA plans from a guru course.

That said, this can be a very positive way to diversify your retirement savings into an asset class that you know and understand.

There are several resources here on BP very knowledgeable in this topic.  Call around and ask questions and that will help you to determine if this is something that will benefit you.

I would add that one can typically not access a current employer 401k plan in order to move those funds to a self-directed plan. Funds from a prior employer plan or in an IRA could be moved.

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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    @Dmitriy Fomichenko

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Gaston Barua

    One can invest IRA or 401k monies into real estate. Keep in mind, however, this is not you investing in real estate and getting to use IRA funds to do so. Rather, the IRA is investing in real estate instead of investing in, say, stocks. You can direct the investments yourself, but you cannot personally benefit in any way other than growing your retirement savings.

    In my many years of experience in this field, I have found that some of the least reliable information on the topic comes from real estate gurus. They focus on getting you excited and opening up your financial resources to put into deals where they or their partners can earn a commission. We have to do a lot of "un-learning" with clients when they first learn about self directed IRA plans from a guru course.

    That said, this can be a very positive way to diversify your retirement savings into an asset class that you know and understand.

    There are several resources here on BP very knowledgeable in this topic.  Call around and ask questions and that will help you to determine if this is something that will benefit you.

    I would add that one can typically not access a current employer 401k plan in order to move those funds to a self-directed plan. Funds from a prior employer plan or in an IRA could be moved.

    1Reply
  • Jack Shea
    Investor · Clearwater, FL · Member since 2015 · 33 posts · 11 votes
    10y

    I agree with Brian that only a past 401(k) can be rolled to an independent custodian. There are a dozen or more. You open an account, typically costs $50. You direct holder of your funds to send the money to the custodian. You form an IRA checkbook trust, using an unrelated independent trustee to sign the checks. You send the trust to the custodian. They are the creator and the beneficiary is your IRA account. The custodian sends your funds to your local bank where your Trustee has an account and checkbook control of your funds. You are the director of the trust and invest in real estate, notes, personal property or whatever you choose. All rent, note payments and other income goes into your corner bank. You do not have to experience the cost or delay of going through the custodian.

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  • Berlinda Luong
    Investor · Morris Plains, NJ · Member since 2016 · 9 posts · 2 votes
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    @Jack Shea

    Sorry about hijacking someone else's post but could you elaborate a bit more regarding whether this new account that is formed using IRA money is like a business account? So you can write checks and such from it for a downpayment, home repairs, closing costs? Do I have a time limit as to when I need to pay that money back? If the IRA has pre-tax money, is that another complication?

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  • Gaston Barua
    OP
    Investor · Palos Verdes Peninsula, CA · Member since 2015 · 41 posts · 6 votes
    10y

    Thanks everyone for the input so far!

    @Jack Shea I have the same question as Berlinda. Also, I was told that I would want to look into doing an "in service transfer" my company currently allows withdrawals and roll overs into IRA accounts, but is an In service transfer different? Also I was told that once i am able to create an account with this company that facilitates this in service transfer process into an IRA that the money I transfer into the IRA would be tax free?

    I am in the process of confirming all these details with my employer as well, but want to have some added input form the BP community.

    Thanks!

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  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
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    @Berlinda Luong

    @Gaston Barua

    In a self directed IRA with checkbook control, the account you setup at a bank is for an LLC of which your IRA is the member (owner) and you are the manager. This is what gives you checkbook control of the retirement funds which you control through the LLC. With an IRA, the LLC is a required component for checkbook control because of the IRA's custodial requirement. Without the LLC, your self directed IRA custodian has the control and makes the investments of your IRA based on your direction.

    With a checkbook Solo 401k, the account you open at a bank is for your Solo 401k trust and since there is no custodial requirement for a 401k, you do no need an LLC for this checkbook control. Keep in mind, that nothing precludes the Solo 401k trust from also having an LLC for investment purposes, though it is not required for checkbook control unlike with the IRA.

    Berlinda, in either case, an investment of your IRA or 401k is not a loan that needs to be paid back. The IRA or 401k owns the investment and receives the profits from that investment. Only the 401k would allow for participant loans meaning YOU can borrow from your 401k, but not from your IRA. Again, no loan in necessary to invest either the self directed IRA or 401k funds into real estate.

    Gaston, in-service withdrawals and in-service transfers are likely being used interchangeably in your recent readings and conversations. The term usually used is "in-service distribution." If your plan allows for in-service distributions, then you can do what you want to do which is a transfer (of at least some of the funds) while you are still working with the company that adopted the plan. The process involves the distribution and subsequent rollover/transfer to another tax advantaged retirement account. Correct, there are no taxes or penalties due on a proper transfer or rollover.

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  • Gaston Barua
    OP
    Investor · Palos Verdes Peninsula, CA · Member since 2015 · 41 posts · 6 votes
    10y

    @Justin Windham thank you very much for the thorough explanation! I have a bit more research to do, but this could potentially kickstart my investing career. 

    Regards,

    Gaston

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  • Tom Sutherland
    Newark, IL · Member since 2016 · 45 posts · 15 votes
    10y

    I'm trying to figure this out. From what I have absorbed on the 401k information. I can go to my bank and request to open a self directed 401k account. Then have my 401k from my retirement through my old employer transferred to the banks 401k acct with no tax taken out of it. After that can I use those funds to provide a loan for real estate? Or buy some real estate on my own? I have about 50k in a 401k and want to leverage it without getting taxed . I currently pull out the minimum annually and pay tax on it because I'm forced to due to retirement

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
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    @Tom Sutherland

    If you qualify for it, you can set up a Solo 401k and transfer your old employer 401k into it. In order to qualify you need to be either self-employed or own a business without any full time employees (excluding spouse).

    You not going to be able to open a self-directed Solo 401k at your bank however. While some banks may offer Solo 401k plans, they do not offer self-directed plans. You need to use a provider specializing in these types of plans specifically. After your plan is established then you can take the paperwork to a bank and open a checking account for your 401k.

    When you say that you pulling out minimum amount from your 401k - do you mean you pull out Required Minimum Distribution? Fund in a Solo 401k would also be subject to RMD.

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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
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    @Tom Sutherland

    The following IRS link covers the 401k loan rules. 

    https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans

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  • Tom Sutherland
    Newark, IL · Member since 2016 · 45 posts · 15 votes
    10y

    Well after delving through all the info I feel there is no sense in bothering with this.

    Thank you for the help.

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