SDIRA >>how to invest

[Patryk Klasa]

Hello, my name is Patryk, I am a new member here.

I am looking for information on how to transfer money from a 401k to an SDIRA, and how I can then invest it in real estate. Does anyone have any experience with this? Thank you in advance for any advice.

[Ryan Coon]

Hi Patryk,

Transferring funds from an existing 401k into an IRA (including an SDIRA) is generally referred to as a "rollover". You need to first set up the IRA (ideally using a company that specializes in this) and then work with the IRA and 401k custodians to accomplish the rollover.

If investing into a real estate in the SDIRA it is generally safest to invest into long-term hold real estate (e.g. long-term rentals) and avoid any active income generating activities such as flipping, wholesaling, Short-term rentals, etc. as these active income activities risk your IRA getting hit with UBIT (Unrelated Business Income Tax) which can quickly rise to a 37% tax on the income.

Additionally, you will also generally want to avoid investing into anything in the IRA using debt or that is otherwise debt-financed because debt-financing in the IRA is considered UDFI (Unrelated Debt Financed Income) which can also trigger UBIT on at least a portion of the income from the debt financed asset(s).

You will also need to be very careful about avoiding having your IRA engaging in "prohibited transactions". In a nutshell, a prohibited transactions is any time you, as the plan beneficiary, provide any financial benefit to the IRA, or when then the IRA transacts business with any prohibited parties which includes, among others, yourself as the plan beneficiary, your spouse, your parents, grandparents, kids, kids spouses, grandkids, grandkids spouses, etc. If your IRA does engage in any prohibited transactions this can completely disqualify the IRA which essentials functions as if you withdrew the entire principal of the plan requiring the payment of taxes, penalties, etc. Thus, avoidance of prohibited transactions is key to making the arrangement function long-term and having a really good SDIRA custodian can help dramatically. Due to the prohibited transaction landscape, you will also not want to self-manage the investment, but rather should generally be using a third-party property management company.

I do generally recommend setting up an LLC, paid for and owned by the SDIRA, to own investment property as this helps limit the exposure of the remaining IRA funds to the liabilities of the property. However, this is a conversation you should have with an experienced attorney.

Also, it is important to note that if the 401k is provided by your current employer, it is generally unlikely that the employer will allow you to rollover the 401k into an SDIRA while you are still employed with them, but this is a conversation you can have with your employer.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.