Retirement account dilemma

11 Replies

  I am new to real estate investing (I have yet to buy my first property) and not a lot on money on hand. I do however have a retirement account with approximately $235,000 in it from a company I no longer work for.

  My question is , how can I best use that money? I can't take it out without being penalized. Can I roll it into real estate? Or possibly roll it into the 401k I have with my current employer where I can take a loan against it?

  The 401k I have is relatively small as I have only worked for this company about 1 1/2 years.

  Any advice I could get would be much appreciated.

 

You may want to consider a ROBS 401k. That would allow you to invest those funds into your (newly formed) company and use them for just about anything without penalty or interest.

@Richard Chagnon

@Daniel Helland ' s recommendation of a ROBS plan is a bit generic.  Such plans are great if your intent is to operate a business that provides a product or service.  in real estate that is not rentals, but rather property development such as new construction or frequent flipping.

If your goal is to diversify that existing savings into real estate, then a self-directed IRA will be the vehicle to explore. Such a plan would not be a means for you to invest in real estate and generate spendable income today, but rather a way to diversify that pile of tax-sheltered money into real estate as opposed to conventional financial products. If you believe that will help you to grow that IRA savings to a larger amount over time than leaving it in the market, then that is the way to go.

There are several providers of such plans active here on BP and a lot of posts on the topic.  Read up and make some phone calls.

I believe you can roll it into a self directed IRA and then use the account to invest in real estate or other investments. There are some extremely knowledgeable folks on BP that I'm sure will reply soon.

Edit:  Looks like @Brian Eastman types faster than I do!

Admittedly, I'm not an expert on ROBS vs SDIRA. My understanding, though, from speaking with an expert on this last week, is that the benefits of a ROBS are that you can pay yourself a salary and PG loans without running afoul of IRS rules. That would effectively allow you to extract money now, as opposed to having to put it all back in the retirement account. Again, I'm no tax attorney, so take it for what it's worth.

Maybe @Brian Eastman can expand on the differences, as it seems to be within his wheelhouse.

@Daniel Helland

Yes, I have been working with both ROBS plans and self-directed IRA plans for more than a decade.

A ROBS plan is a means to use existing retirement plan funds to capitalize a business that you will be actively engaged in.  You can work in the business and draw a salary.  There are no taxes or penalties for using the retirement funds to start/buy a business, but the business will operate as a taxable entity.  As I noted earlier, you must be operating a real business, not managing passive investment holdings for this plan to work.

With a self-directed IRA or Solo 401(k), the aim is to retain the tax-sheltering benefits such plans provide. The purpose of such plans is simply to expand the investment choices beyond conventional financial products and into asset classes such as real estate, private mortgages, stock of privately held companies, virtual currencies, etc. Just like investing in the stock market, however, all such activities are exclusively under the umbrella of the plan and not for your current benefit. Your benefit is to grow your retirement savings more effectively by investing in what you know.

Thank you both for your advice. I will read up and educate myself more on this subject.

@Brian Eastman If I'm reading this right, if I roll the money into a self-directed IRA or solo 401k I could buy rental properties but any money made would go back into my retirement.

  What about rolling it into my current 401k where I could take a loan? Is that a bad idea? Is it legal?

@Richard Chagnon

You can likely do that as well.  The maximum you can borrow from a retirement plan such as a 401(k) is $50K or 50% of the account value.  So, if you rollover enough to have $100K in your current employer plan, you should be able to take the maximum loan.  Check with your plan administrator to ensure the offer a loan and what the terms would be.  A 5 year maximum is to be expected.  I would also check to be sure that if you roll in funds from a prior plan, you have the ability to choose to roll those out again in the future, even if you are still employed with the current employer.  

The issue with that strategy is that you are handcuffing the growth of your tax-sheltered retirement savings.  Most loans are only repaid at Prime + 1-2%, so at most your plan is probably making 6.25% on that money.  If, on the other hand, you could invest the plan directly into something that earns 10-12% (easy), then by taking the loan you are giving up a lot of tax-deferred compounding over time.

@Richard Chagnon

I use both a ROBS 401K and a Self Directed IRA. In order to determine which product to use, you need to know what type of investing your are going to do.

I use the ROBS for flipping and the SDIRA for private lending and buy and holds.

With a ROBS 401K you can operate a business, such a flipping houses, and pay yourself a salary.  There are yearly expenses of about $2000 to maintain the company.  This is not a good setup if you want to buy and hold.

With a Self-Directed IRA you cannot operate a business. The activity needs to be passive in nature, such as rental properties, private lending, tax liens ect. It is difficult to flip houses under this setup because the IRS views flipping as a business. However, it is possible to flip about 3 houses per year, provided that is not all you are doing. (Check with an accountant or attorney on this).

Hope this helps and good luck!

Compared to other retirement structures, the ROBS strategy is quite a bit more complex and expensive and is designed for running an active business rather than holding passive investments.

The self-directed IRA and the Solo 401k are simpler and less expensive structures commonly used to hold real estate and other investments for tax-free or tax-deferred growth of the retirement account. While the Solo 401k does have eligibility requirements that do not apply to self-directed IRAs, there are many benefits that usually make the Solo 401k the better choice for those who are eligible.

Originally posted by @Brian Eastman :

@Richard Chagnon

@Daniel Helland ' s recommendation of a ROBS plan is a bit generic.  Such plans are great if your intent is to operate a business that provides a product or service.  in real estate that is not rentals, but rather property development such as new construction or frequent flipping.

If your goal is to diversify that existing savings into real estate, then a self-directed IRA will be the vehicle to explore. Such a plan would not be a means for you to invest in real estate and generate spendable income today, but rather a way to diversify that pile of tax-sheltered money into real estate as opposed to conventional financial products. If you believe that will help you to grow that IRA savings to a larger amount over time than leaving it in the market, then that is the way to go.

There are several providers of such plans active here on BP and a lot of posts on the topic.  Read up and make some phone calls.

We have used our SDIRA to purchase both housing and notes. As we a near retirement, we prefer to have our finances in more tangible assets like RE.  

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