Using Tax Deferred IRA for Real Estate Investing

Investor · Central FL · Member since 2018 · 6 posts · 0 votes

I have cash sitting in a tax deferred IRA account. I am looking for alternative tax strategies to use in investing these funds for real estate investing. I realize by taking a cash distribution it would be considered as income and I would be taxed a minimum of 20% if not higher depending of my tax bracket for that year. I could have a Solo 401k account set up and have my funds transferred to it but I would not be able to utilize depreciation expense like I would be able to outside the account Any advice would be greatly appreciated.

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Brian EastmanPro Member

Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes

@Bob Reinhard

If one is self-employed and has no full time employees, they can establish a Solo 401(k) plan. A Solo 401(k) can accept rollovers from most tax-deferred IRA plans and any tax-deferred or Roth employer plan such as a prior employer 401(k).

As an employer sponsored retirement plan, a Solo 401(k) has several advantages over an Individual Retirement Account (IRA), such as higher contribution limits, the ability to house both tax-deferred and Roth funds within the same plan, a participant loan feature, and an exemption from tax on the portion of income attributed to debt-financing in real estate investments (UDFI).

Not everyone qualifies for a Solo 401(k), however, and a self-directed IRA is still a fantastic way to take more control over your existing savings and be diversified.

@Kevin Hayes

Dmitriy has covered the topic well, but the key point in evaluating a self-directed strategy is to understand this is still tax-sheltered retirement money, not personal money. Investing rules and taxation are very different as a result. If you can grow and protect your retirement savings in a self-directed IRA or Solo 401(k) and investments in alternative assets like syndications better than you might by allocating 100% of that money to conventional publicly traded investments, then a self-directed retirement plan can make sense for you.

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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
4y
@Kevin Hayes,

Congratulations on your first forum post!
Your understanding is correct, if you pull funds out of your IRA - the amount will be taxable based on your tax bracket for the year. Realize that distribution will be counted as income for you in the year that you pull it out and likely will push you in a higher tax bracket. In addition to that early distribution will be subject to federal and state penalties. I've seen people lose as much as 40-50% in taxes and penalties so if you are under normal retirement age and have to pay penalties I would certainly not recommend this strategy - this would be poor financial move. Now I'm not a CPA so be sure to consult with your tax professional before pulling the trigger if you decide to go this route.

You are also correct that there are no depreciation benefits to you personally when you invest inside of a self-directed Solo 401k plan. After all this is not your personal investments so there is no personal tax benefits just like there are no taxes for income or gains these investment produce. The key in using retirement accounts to invest is tax-deferral, your funds will grow much quicker since you are not losing any of your gains to taxes. The question you need to ask yourself is this: would you prefer to leave your IRA invest in the stock market (subject to volatility and you don't have any control over it), or convert to self-directed 401k and invest in something that you have much greater control over such as real estate?
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Taylor L.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
4y
There are many ways to invest SDIRA or Solo k funds in real estate. I have found that SDIRAs are better used for lending than investing in leveraged real estate. When invested in leveraged real estate (such as a typical syndication) the SDIRA will most likely incur Unrelated Business Income Tax, which eats into your profits, and generally adds complexity and headaches. I have invested my SDIRA in several syndications over the years, and while it has been profitable, I have grown tired of the UBIT hassle.
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Kevin HayesPro Member
OP
Investor · Central FL · Member since 2018 · 6 posts · 0 votes
4y
Thank you Dmitriy for your advice. I am over 59 1/2 so there is no early withdrawal penalty. I wish I had started a Roth account when they had become available. Since my funds are in a tax deferred IRA, I believe transferring my cash to a Solo 401k is my best option and I understand that I could rollover my real estate income generated in the Solo 401k to a Roth conversion with the understanding the five year hold clock would start at the time of deposit to the Roth account. I was wondering if there were any other vehicles that would be more advantageous than the Solo 401k for investing in real estate.
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Kevin HayesPro Member
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Investor · Central FL · Member since 2018 · 6 posts · 0 votes
4y
Thank you Taylor for your advice. In regards to lending, are you referring to non-performing notes and hard money lending?
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Bob ReinhardBusiness Member
Lender · Patterson, NY · Member since 2017 · 488 posts · 186 votes
4y
Greetings .
I use a self-directed IRA for such investment purposes.
Be advised that you yourself may not manage such properties nor may any monies other than self-directed funds be used in furtherance of same, nor may you have any legal interest in any entity involved in any way with the property.
Search out a self-directed entity for investing.
Much success!!
Bob
[email protected]914-861-5501
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
4y
@Kevin Hayes,
Self-directed Solo 401k is the best of all self-directed retirement accounts, it is the most flexible, cost effective and give you 100% control. You can learn more in this thread:
https://www.biggerpockets.com/...
After you rollover your pre-tax IRA into Solo 401k you will have the ability to convert portion (or all) into Roth and then invest tax-free for the rest of your life.
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Kevin HayesPro Member
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Investor · Central FL · Member since 2018 · 6 posts · 0 votes
4y
Thank you Dmitriy.
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Bob ReinhardBusiness Member
Lender · Patterson, NY · Member since 2017 · 488 posts · 186 votes
4y
@Dmitriy Fomichenko
Does that not presuppose that one has a 401k? Or is there a way to transfer IRA monies into a 401K?
Bob
[email protected]914-861-5501
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
4y
@Bob Reinhard

If one is self-employed and has no full time employees, they can establish a Solo 401(k) plan. A Solo 401(k) can accept rollovers from most tax-deferred IRA plans and any tax-deferred or Roth employer plan such as a prior employer 401(k).
As an employer sponsored retirement plan, a Solo 401(k) has several advantages over an Individual Retirement Account (IRA), such as higher contribution limits, the ability to house both tax-deferred and Roth funds within the same plan, a participant loan feature, and an exemption from tax on the portion of income attributed to debt-financing in real estate investments (UDFI).
Not everyone qualifies for a Solo 401(k), however, and a self-directed IRA is still a fantastic way to take more control over your existing savings and be diversified.

@Kevin Hayes

Dmitriy has covered the topic well, but the key point in evaluating a self-directed strategy is to understand this is still tax-sheltered retirement money, not personal money. Investing rules and taxation are very different as a result. If you can grow and protect your retirement savings in a self-directed IRA or Solo 401(k) and investments in alternative assets like syndications better than you might by allocating 100% of that money to conventional publicly traded investments, then a self-directed retirement plan can make sense for you.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
4y
@Bob Reinhard,
Yes, you can transfer an IRA (or any other retirement account) into self-directed Solo 401k plan (the only exception would be Roth IRA).
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Colton Hahn
Specialist · Member since 2021 · 322 posts · 273 votes
4y
Quote from @Kevin Hayes:

I have cash sitting in a tax deferred IRA account. I am looking for alternative tax strategies to use in investing these funds for real estate investing. I realize by taking a cash distribution it would be considered as income and I would be taxed a minimum of 20% if not higher depending of my tax bracket for that year. I could have a Solo 401k account set up and have my funds transferred to it but I would not be able to utilize depreciation expense like I would be able to outside the account Any advice would be greatly appreciated.

Hey Kevin, at BAM we have investors use SDIRA all the time. Just have to make sure you are using a custodian that allows for private placements. We prefer using Advanta but you can find ones out there that allow for alternative investments :)
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
4y
I normally don't think its good to invest in real estate directly using a retirement account.

1. The annual depreciation on the property is somewhat lost when investing through a retirement account
2. You have to be very careful when investing in real estate - If you do not have enough capital, you may have to be forced to sell.
3. taking out RMD's can be very tough to take at the later stages.

Best of luck
[email protected]917-280-8544
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Kevin HayesPro Member
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Investor · Central FL · Member since 2018 · 6 posts · 0 votes
4y
Thank you Basit.
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