Cincinnati, OH · Member since 2015 · 81 posts · 24 votes
I'm not new to real estate investing, but still inexperienced. Why do people fawn over self directed 401k's. I mean, you get to invest in real estate tax free. That's absolutely amazing, BUT you can't start pulling out your money until almost 60. So if you want to retire early, aren't they pretty much useless. Maybe I'm missing something about it. Hope I'm posting this in the right forum.
It is a very simple analysis. If you have money in a retirement plan today, what it is earning? If you understand an asset class such as real estate, notes, or private equity and have opportunities within your network that allow you to get a better rate of return, then your tax-sheltered retirement savings is performing better.
If you grow your retirement plan from $100,000 to $1,000,000 in real estate, you will pay more in taxes on the back end than if you left it in the stock market and only grew it to $500,000 or $800,000.
The Rich Dad guys are making the wrong argument. Comparing investing in ANY asset class with tax-deferred retirement savings as compared to after-tax money will have different tax consequences. Comparing the two is comparing apples and oranges.
Sure, if you have piles of money in both qualified and non-qualified funds, you may choose to diversify in ways that you put the most tax-favorable investments in the non-qualified bucket. But at the end of the day if you can get %12 or better investing in a secure asset, that is better than getting 6% in a volatile asset... every day and every way.
Nicholas Patrick , you are looking at this as an EITHER/OR situation when you should be looking at it as an AND.
Use a self directed IRA/401k AND your taxable savings to invest. One will be more focused on short term and one will be more focused on long term.
Also, if you have a current 401k where you work, you may be able to borrow from it (depends on your particular plan rules) - you pay interest on that back into your account so you're basically paying yourself interest...
I believe that you can take the funds from your 401(k) early if you want them. Withdrawing from the 401(k) umbrella has an early withdraw penalty.
So if you hit your monetary goal early, then withdraw, pay the IRS, and go on with your retirement.
Flipping houses is considered a business and if done on a frequent basis would not be 100% sheltered under the umbrella of a self-directed retirement plan.
Such plans are fully tax sheltered when receiving passive income, which includes interest, dividends, royalties, and rent from real property.
When a tax-exempt entity is engaging in a trade or business on a regular or repeated basis, then a tax known as UBIT (Unrelated Business Income Tax) applies to the gains. This tax pre-dates IRA & 401k plans and is designed to level the playing field so that tax-exempt entities do not drive taxpaying businesses out of business.
So, repeated flipping in a self-directed plan will be subject to UBIT, and the rates can be as high as 39%.
Alternatives to take advantage of flipping opportunities with an IRA or 401(k) include being a hard money lender to another investor who is flipping the house, or what we call a hybrid flip where you buy-fix-rent - then sell after more than a year. These approaches would both create passive income not subject to UBIT.