Using a Self Directed IRA or Solo 401K to Buy & Hold
Investor · Richmond, VA · Member since 2020 · 30 posts · 14 votes
Using a Self Directed IRA or Solo 401K to Buy & Hold
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Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
2yIt is a horrible plan unless you have ZERO other ways to invest in real estate.
You don’t get to use depreciation. (You won’t get the ongoing tax break and you’ll be selling or paying the taxes to cash out.)
You convert capital gains income in to regular income.
When it comes times to start taking RMD’s you either have to sell and face a big tax bill or come out of pocket for all the taxes due.
You can NEVER personally use, work on manage the properties until you take them out of your retirement account, or your ENTIRE account is considered taxable.
You pay higher interest rates for non-recourse loans.
You must never screw up and use a credit card or any other form of personal payment or your ENTIRE account is considered withdrawn and taxable.
You can not hold them until your death and leave them to your heirs tax free, they must withdraw them and pay massive taxes or sell them.
You can’t borrow tax free against them with a cash out refi.
You can not partner with relatives or have them do any work on or stay in your properties.
Assuming you have ANY other funds to invest instead, what’s the upside to using your retirement funds instead?
17 Replies
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes2y
It is a horrible plan unless you have ZERO other ways to invest in real estate.
You don’t get to use depreciation. (You won’t get the ongoing tax break and you’ll be selling or paying the taxes to cash out.)
You convert capital gains income in to regular income.
When it comes times to start taking RMD’s you either have to sell and face a big tax bill or come out of pocket for all the taxes due.
You can NEVER personally use, work on manage the properties until you take them out of your retirement account, or your ENTIRE account is considered taxable.
You pay higher interest rates for non-recourse loans.
You must never screw up and use a credit card or any other form of personal payment or your ENTIRE account is considered withdrawn and taxable.
You can not hold them until your death and leave them to your heirs tax free, they must withdraw them and pay massive taxes or sell them.
You can’t borrow tax free against them with a cash out refi.
You can not partner with relatives or have them do any work on or stay in your properties.Assuming you have ANY other funds to invest instead, what’s the upside to using your retirement funds instead?
- Investor · Richmond, VA · Member since 2020 · 30 posts · 14 votes2y
Thanks @Bill B. for the detailed response. You have hit ALL of the areas of concern that I have with using my account for buy and hold or fix & flips. I've had some folks recommend using it for those purposes and I just can't see the benefit. I thought maybe I was missing something. I was looking for someone who is more experienced than I am to confirm my assumptions so I appreciate you taking the time to break it down.
What are your thoughts on using self directed retirement accounts for private money lending? That's what I'm doing at the moment. (Maybe that should be an entirely separate thread)
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
@Elizabeth Lark self directed accounts are so "interesting" that my accountant won't touch them. Its not cost effective for him (even if billing by the hour) nor for the client to deal with it because most people just screw it up.
I know there are lots of people pushing for self-directed accounts. I'm sure if one can walk that "straight and narrow" path to doing it right, then its worth it. But, I'm not that desperate to potentially jeopardize my account's status.
As for private lending, I THINK debt is safer with the self directed accounts. but, like I said, I've stayed away from it all. Sorry, i can't help more. Good luck.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes2y
Is it debt way above the 5-6% you can get guaranteed from the bank? (Say 10-12% minimum.). Is the debt on property you would want to own in your Ira or you could sell at a profit after a 10-20% "get this sold" discount and 10% in selling costs? (Say 60% LTV) Do you have enough reserves to go after the collection of this debt if they stop paying? (Remember you can't pay for that, the Ira has to.)
If the answer to all of these questions is yes, then it’s probably fine. Remember not to borrow to relatives. Don’t be involved with those properties in ANY other way (management, lending, repairs, etc.) Be prepared to lose money on some deals. Obviously make sure you record liens against the property, try to get the borrower to personally guarantee the debt, charge points up front, get an appraisal. And vet the heck out of everyone you fund.
- Investor · Richmond, VA · Member since 2020 · 30 posts · 14 votes2y
Quote from @David M.:
@Elizabeth Lark self directed accounts are so "interesting" that my accountant won't touch them. Its not cost effective for him (even if billing by the hour) nor for the client to deal with it because most people just screw it up.
I know there are lots of people pushing for self-directed accounts. I'm sure if one can walk that "straight and narrow" path to doing it right, then its worth it. But, I'm not that desperate to potentially jeopardize my account's status.
As for private lending, I THINK debt is safer with the self directed accounts. but, like I said, I've stayed away from it all. Sorry, i can't help more. Good luck.
Thanks @Bill B. - I think I'm on the right track!
- Investor · Richmond, VA · Member since 2020 · 30 posts · 14 votes2yThe custodian for my account has been very helpful in making sure that I know and understand the "rules" around how I can utilize the funds for real estate investing. That's really helped me to feel more comfortable about leveraging the account for real estate investments. I'm finding that purchasing properties to hold or to fix & flip isn't really the investment strategy that I want to execute. I'm going to give lending out of the account a try to see how I like that. At the moment, I'm lending on local deals and I've been proceeding with caution for sure (putting a lot of the guardrails that Bill mentioned in his post in place). Thanks for taking time to share your perspective!
Quote from @David M.:
@Elizabeth Lark self directed accounts are so "interesting" that my accountant won't touch them. Its not cost effective for him (even if billing by the hour) nor for the client to deal with it because most people just screw it up.
I know there are lots of people pushing for self-directed accounts. I'm sure if one can walk that "straight and narrow" path to doing it right, then its worth it. But, I'm not that desperate to potentially jeopardize my account's status.
As for private lending, I THINK debt is safer with the self directed accounts. but, like I said, I've stayed away from it all. Sorry, i can't help more. Good luck.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
@Account Closed Well, generally from an "investing" perspective, liquating your 401k portfolio isn't really wise. Better to keep it in the tax advantaged system as its pretty hard to get the money in there in the first place. Perhaps smartly convert it over to a Roth IRA to have tax free for the rest of your life.
I think some people invest in debt via the Roth, which is supposed to be an allowable play.
As far as a retirement portfolio... What wouldn't be better than a Roth which is tax free, has no maintenance issues, and is "instantly" transferred to your heirs upon your death (any account names beneficiaries and is transferred on death).
As always, it comes down to what one is comfortable investing in, or having somebody else invest / manage for you, and what can you effectively make money.
- Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes2y
Hey @Elizabeth Lark,
As mentioned in some other responses, one of the superpowers of real estate is its tax treatment, and you are forfeiting powerful strategies when you hold them in a retirement account as you describe. We want our properties to help offset other active income we generate and eventually create passive income.
- Investor · Punta Gorda, FL · Member since 2010 · 151 posts · 128 votes2y
@Elizabeth Lark I use my SD IRA and my QRP to lend money to real estate investors. It has worked out well for me and I like not having to pay taxes on the gains which helps me increase the amount I'm able to lend next time if needed. I've been fortunate that I haven't lost money lending through my retirement accounts....yet......but I have lost money lending outside of it.
The more lending you do, the more likely it is that someone will not pay you back so just be prepared for that. Like you said, put the proper protections in place but know that you can still lose your money - unless you are in first position.
- Member since 2024 · 9 posts · 1 vote1y
Hi @Deb, just wondering what self-directed IRA firm you are using to do this for private lending? Thinking about doing the same (for my solo 401K) and considering Rocket dollar, equity trust, broad financial, etc. Wondering if you had any feedback for those firms or if you have something else you'd recommend!
- 1yJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
Hi Elizabeth,
Using a self-directed IRA to invest in real estate can indeed be a viable option, but there are several important considerations to keep in mind.
As you’ve noted, any loan used by your solo 401(k) must be non-recourse, meaning you can’t personally guarantee it. This can limit your financing options and potentially lead to higher interest rates.
Be cautious about prohibited transactions and disqualified persons, as outlined by IRS rules. For example, you cannot purchase property directly from yourself or a close family member, and you or any disqualified persons (such as family members) cannot use the property personally. Violating these rules can lead to severe IRS penalties, including disqualification of the tax-advantaged status of your retirement account.
Each self-directed retirement account must have sufficient funds to cover all property-related expenses, as you cannot personally pay these expenses. If you’re considering holding multiple properties, managing cash flow within the account to cover these expenses is crucial.
If you convert a Traditional IRA to a Roth IRA, be aware of the tax consequences, as the conversion amount is taxed as ordinary income. This could significantly impact you if the Traditional IRA balance is large. Additionally, unrelated business income tax (UBIT) might apply if your property is financed.
One option to consider is partnering funds from multiple accounts or other individuals to share in the investment, which may avoid the need for difficult-to-secure non-recourse financing. However, ownership distribution must be clearly outlined based on each party’s financial contribution, and income and expenses must be divided accordingly.
You might look into forming an LLC or limited partnership to pool funds, which can streamline asset management. However, disqualified persons cannot be involved as partners if they're prohibited from benefiting from the investment.
Overall, investing through a self-directed IRA is a strategic way to diversify retirement funds into real estate. However, strict compliance with IRS rules is essential to avoid penalties and preserve the tax advantages.
Best of luck with your investment!
Malabute & Company CPAs525 Reviews - Investor · Punta Gorda, FL · Member since 2010 · 151 posts · 128 votes1yHi Audris, I use Equity Trust as my SD IRA custodian. I don't know much about those other firms you mentioned. I don't have any complaints. They are pretty easy to do transactions with. Hope this helps!
Quote from @Audris Tien:
Hi @Deb, just wondering what self-directed IRA firm you are using to do this for private lending? Thinking about doing the same (for my solo 401K) and considering Rocket dollar, equity trust, broad financial, etc. Wondering if you had any feedback for those firms or if you have something else you'd recommend!
- 1yBrett SynickyPro MemberSolo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 498 votes
Quote from @Audris Tien:
Hi @Deb, just wondering what self-directed IRA firm you are using to do this for private lending? Thinking about doing the same (for my solo 401K) and considering Rocket dollar, equity trust, broad financial, etc. Wondering if you had any feedback for those firms or if you have something else you'd recommend!
Make sure to check company reviews and educate yourself on the difference between checkbook IRA and Custodial SDIRA. While every IRA must have a custodian creating a special purpose LLC can allow you to bypass the custodian when making investments and performing transactions which can save time and money. Furthermore unless you have a Roth IRA (can't move into Solo 401k) there really isn't a good reason to establish an SDIRA and a Solo 401k since you can do everything in the Solo 401k.
Furthermore, the Solo 401k really is a superior product than an IRA. No UBIT on leveraged real estate. 10x higher annual contribution limits. Pre-tax and Roth built in. Participant Loan. Cheaper and easier to maintain. Just to name a few.
Be sure to educate yourself on the prohibited transaction and disqualified person rules that apply to both plan types.
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