403b to IRA for Real Estate Investments

6 Replies

Hi Everyone, 

Like you I am listening to all the bigger pockets podcasts and learning about self directed IRA's and how those can be used for Real Estate Investments. However, I am having a heck of a time trying to figure out how to transfer my 403b to an IRA. The companies are giving me the run around like you wouldn't believe!

Anyone with experience in dealing with this space? Thanks in advance everyone and happy hunting! 

@Kyle Woodruff

It sounds like you are reaching out to Wall Street focused advisors and firms. Self-directed IRA and Solo 401(k) plans are a specialty niche. Several companies that focus on the guidance necessary to utilize an IRA for alternative asset investing are active here on BiggerPockets.

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.

What I can help you do, however, is refine your question.

Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

Thank you Brian for the thought out response.  So many questions are out there about this and you really helped clarify some key points!! Bigger Pockets needs to invite you to talk on the podcast!! 

@Kyle Woodruff

Is the 403b with the current or previous employer? This will likely make a difference on what your 403b plan allows. If this is a previous employer plan, you will be able to transfer the assets to a self-directed IRA or a Solo 401k. You will just need to reach out to a provider that offers these structures. Choosing a provider can sometimes be confusing because brokerage firms like Schwab, Fidelity, and Etrade offer Solo 401ks and IRAs. Those plans will not allow you to invest into alternative assets however. If you have your IRA or 401k set up by the right firm on the other hand, you can invest into alternative assets and still open an account with the traditional brokerages to invest into stocks and related assets. This is a very common strategy among the investors that I speak with. It sounds like you were starting with the wrong companies to get the information you need but that is an easy enough fix. There are several self-directed IRA snd Solo 401k providers that post regularly to these forums. I would recommend reaching out to a few to learn more about your options.

@Kyle Woodruff

I definitely understand wanting more control of your money. Most employer plans don't let you move assets while you are still working there, unfortunately. Some plans allow for what is called in-service distributions but it is fairly rare. If you haven't already, you can ask your plan administrator about this feature. Otherwise you will have to wait until you leave that job before you can move assets to a self-directed structure.