I currently have a traditional IRA with 150k approx. I currently have 3 rental properties cash flowing. First and second property SFH equity $90k, approx. 3rd property $160k I bought it with a home equity loan on my residence. $130k loan value.
Thinking about reducing taxes and fees, would it be better to get a 401k solo or a SDIRA or should it be better to get a conventional mortgage with current rates.
I don't know much about 401k solos or sdiras but I am learning and I am willing to make the change if it would be the best choice.
Thank you
Whether investing in real estate with retirement plan funds or personal funds is "better" is a difficult question with no one answer. They are very different approaches, just like investing in stocks with personal vs IRA funds.
The primary reason to consider investing retirement funds in real estate is if you believe you can protect and grow your tax-sheltered retirement savings better by having the plan investing in real estate rather than what it is invested in today. It is all about asset choice and diversification for the retirement plan.
Whether an IRA or Solo 401(k) will best suit your needs depends on your situation. A Solo 401(k) is only available to someone who is self-employed and has no non-owner employees in any business they control. Rental properties produce passive investment earnings, not self-employment income. So, unless you have something else that produces earned self-employment income, the IRA route would be appropriate.
There are several quality providers of self-directed plans active here on BP. Do a little reading then get on the phone with a few. You will learn quickly about the opportunities and limitations of a self-directed retirement plan.
Whether investing in real estate with retirement plan funds or personal funds is "better" is a difficult question with no one answer. They are very different approaches, just like investing in stocks with personal vs IRA funds.
The primary reason to consider investing retirement funds in real estate is if you believe you can protect and grow your tax-sheltered retirement savings better by having the plan investing in real estate rather than what it is invested in today. It is all about asset choice and diversification for the retirement plan.
Whether an IRA or Solo 401(k) will best suit your needs depends on your situation. A Solo 401(k) is only available to someone who is self-employed and has no non-owner employees in any business they control. Rental properties produce passive investment earnings, not self-employment income. So, unless you have something else that produces earned self-employment income, the IRA route would be appropriate.
There are several quality providers of self-directed plans active here on BP. Do a little reading then get on the phone with a few. You will learn quickly about the opportunities and limitations of a self-directed retirement plan.
Hi Josie,
The Solo401k or an SDIRA will completely eliminate capital gains tax if the investment is made inside of one of those accounts. However, these types of entities would not be able to get a conventional loan to finance a purchase. It would have to be a non-recourse loan.
The Solo401k is special when it comes to financing deals because there is no UDFI tax that would normally apply to leveraged retirement account investments.
Happy to discuss further
Edit: Just noticed the post above from Brian, good stuff!
A Solo401k has many more benefits than a self directed IRA, but the bat to qualify if higher. Google and see the requirements. Having rental properties alone is not enough to qualify.
Hi @Josie W. - everyone on this thread has already mentioned a lot of great points for you to consider. This is probably obvious, but just in case, I want to add that when considering using your retirement account to invest in real estate you have to keep in mind that you won't personally get access to the cash flow or appreciation from the properties you purchase without penalty until you are 59 1/2 - those profits will go back into the retirement account, but of course you can use them to reinvest in something else through the retirement account as it (hopefully) grows.
If using cash or a HELOC is an option I always lean towards that as the first choice, since you can keep the profits to use as you wish now, but leveraging your retirement is a great way to keep the train moving even if you aren't very liquid currently.
When you use your retirement account to invest you don't get the depreciation write offs as you hold the property, but as @Alex Sylvia mentioned - it can help with capital gains on the backend.
I have personally opened a SD-IRA and helped a bunch of my family members do the same, but we used ours to invest in real estate syndication opportunities as opposed to buying rental properties - another option for you to consider!
Thanks for the mention @Christine Bellish
An interesting rabbit hole, however, is when a retirement account uses debt-leverage to finance a purchase. Unless done in a Solo401k, an IRA using debt leverage would trigger UDFI tax.
Now the fun part..
When an IRA becomes a tax-payer, it can now use write offs to the same percentage-extent that your asset is debt-leveraged.
E.g. if your rental property is 70% debt-leveraged, UDFI tax would apply to roughly that same percentage of your net income, but you can now also use roughly 70% of write offs as well.
CPA Adam Barr did a great webinar in recent weeks covering things to consider with debt-leveraged IRA or Solo401k investments.
Thank you very much. Lots of great information to take.
@Brian Eastman, thank you for explaining the fact that rental properties are passive income, which differs from self employment income, it helps to have that clarified! . It makes a lot of sense. Since most of my income is from a W2, I can't do the 401k solo.
@Alex Sylvia, I like the fact that I can eliminate capital tax. That is a great incentive.
Also Thank you for talking about debt leverage and that UDFI tax. That I had to read twice, all new concepts for me... Thank you for explaining that and the webinar link.
@Christine Bellish, thank you for bring up that I can't use the cash flow, my goal is to reinvest it and keep it growing.
Thank you for bringing up the point of syndications. I have come across that term in different posts in bigger pockets. Something I would like to do also, but I don't know much about yet. This is one of the things I like about real estate. There are lot of choices to invest!!
Again, I am glad I posted here, I got answers with lots.of feedback and awesome pointers. One of the things I love about bigger pockets is all the people that form this community and are willing to share with others!!
Thank you very much. Lots of great information to take.
@Brian Eastman, thank you for explaining the fact that rental properties are passive income, which differs from self employment income, it helps to have that clarified! . It makes a lot of sense. Since most of my income is from a W2, I can't do the 401k solo.
@Alex Sylvia, I like the fact that I can eliminate capital tax. That is a great incentive.
Also Thank you for talking about debt leverage and that UDFI tax. That I had to read twice, all new concepts for me... Thank you for explaining that and the webinar link.
@Christine Bellish, thank you for bring up that I can't use the cash flow, my goal is to reinvest it and keep it growing.
Thank you for bringing up the point of syndications. I have come across that term in different posts in bigger pockets. Something I would like to do also, but I don't know much about yet. This is one of the things I like about real estate. There are lot of choices to invest!!
Again, I am glad I posted here, I got answers with lots.of feedback and awesome pointers. One of the things I love about bigger pockets is all the people that form this community and are willing to share with others!!
Your personal rental properties are not really relevant for this discussion. I believe you should look at it this way:
You have an IRA with $150K. What are your options for these funds? Here are few possibilities:
1. Keep it as is and continue to invest in the market (stock, mutual funds). You have zero control over the investment and hopefully will make good choices that will enable your investment to grow over time. But there are number of factors that can affect your investment which will result in losses. Somewhat of a gamble...
2. Take a distribution, pay taxes and penalties and invest what's left in rentals or do whatever you wish. You have much grater control, much more investment choices, depending on your choice less risk and higher returns than the stock market. But depending on your tax bracket you may end up with only half of the original amount (after paying taxes and penalties). Poor choice in my opinion.
3. Convert to self-directed IRA and similarly to option 2 above you can have access to many investment options, higher return and lower risk. Continue to invest in tax-deferred environment.
Take time to analyze, but this overview should help you make the right decision for you.