Using my pension as an investment in real estate

Tax, SDIRAs & Cost Segregation
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Using my pension as an investment in real estate

Michael Trinsey
Investor · Clermont, FL · Member since 2018 · 26 posts · 17 votes

I have a pension worth 60,000 and would like to cash out. Does anyone know what and if I have to pay taxes on the money if I use it to invest in real estate? I'm 62 and I was able to cash out at 55 without penalty. Thank you in advance!

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
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@Michael Trinsey

No, you do not cash out and then put money into an IRA. You transfer the money directly from the pension to the IRA - assuming your pension allows this option.

But before doing anything, I highly recommend letting a CPA or a financial advisor review your pension's terms. It's quite possible that cashing out on your pension is a bad idea long-term. Kinda like making a chicken soup out of the chicken that could provide you eggs for many years.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Michael Trinsey

    If you cash out the pension, you will pay income tax but no penalties as you are over normal retirement age.

    Alternately, you could roll the pension to a self-directed IRA and then the IRA could invest in real estate.

    If you opt for a self-directed IRA, there are no taxes or penalties, so you would have the full value to invest with. The investments need to be done under the umbrella of the IRA, with no direct or indirect benefit to/from you - so all expenses are paid by the IRA and all income received (tax-sheltered) by the IRA. Since you are over retirement age, you can choose to take distributions of the income your investments produce and will pay taxes only on what you take out.

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  • Michael Trinsey
    OP
    Investor · Clermont, FL · Member since 2018 · 26 posts · 17 votes
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    Brian,

    Thanks so much for your reply.

    So, I cash out, put my money in an IRA. I then use the cash from the IRA to invest. All income recieved has to go back into the IRA or I have to pay taxes just on the income generated by the investment property if I keep that money.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Michael Trinsey

    Yes, your basic understanding is correct. Investing in real estate with an IRA is kind of like building your own personal annuity. The savings principal is backed by a solid asset. You can then draw off the income that asset produces without needing to liquidate the principal.

    Also, to tag someone in BP forums, enter the @ sign then start typing their name.  You will then be able to select the name from a drop-down.

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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
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    Just curious, but usually a pension with that kind of value belongs to someone who paid into the system long enough to be vested (usually 5 years or more). Can you draw that as a monthly income payment, and how much would you draw?

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  • Michael Trinsey
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    Investor · Clermont, FL · Member since 2018 · 26 posts · 17 votes
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    JD,

    Yes, I'm 62 and I could have started to draw my money out at 55.

    I'm not sure which would be the better option, lump sum into a IRA or Roth IRA and then borrow the money for investing as Brian Eastman suggested.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Michael Trinsey

    To be clear, with a self-directed IRA, you are not borrowing money from the IRA. The IRA is directly investing into the real estate instead of investing into, say stocks or funds.

    If the return on investment you can produce in real estate is better than the guaranteed rate of return in the pension, then it makes sense.  If not, then not.

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  • Michael Trinsey
    OP
    Investor · Clermont, FL · Member since 2018 · 26 posts · 17 votes
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    Brian,

    Got it. 

    Thanks Brian.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
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    @Michael Trinsey

    No, you do not cash out and then put money into an IRA. You transfer the money directly from the pension to the IRA - assuming your pension allows this option.

    But before doing anything, I highly recommend letting a CPA or a financial advisor review your pension's terms. It's quite possible that cashing out on your pension is a bad idea long-term. Kinda like making a chicken soup out of the chicken that could provide you eggs for many years.

    3Reply
  • Account Closed
    Rental Property Investor · Brooklyn NY · Member since 2018 · 263 posts · 469 votes
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    @Michael Trinsey - Do you have any other paper assets?  Can you draw from savings?  Do you need this pension?

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  • Marian Smith
    Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
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    @Michael Trinsey Just remember you are taking a passive investment earning x% and buying what is essentially a pt job. The sdira charges fees, your tax guy will too and if you hire a pm he costs money. You will get an asset that is wearing out but if area jobs are plentiful it will appreciate with inflation. Stocks are a good inflation hedge as well. Can you move your pension to schwab or elsewhere and use it as collateral for a re loan? Interest rates are still low and you get the full benefit of interest write off with a loan.
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  • Michael Trinsey
    OP
    Investor · Clermont, FL · Member since 2018 · 26 posts · 17 votes
    8y

    I'm very new at this so here's a little more about my pension. It has been closed for some time. I could have started collecting at age 55. I'm 62 now. My wife and I have full time jobs. But we are about to be debit free. I don't have much money to invest right now. Just the pension. I do have a 401k too!

    Should I wait to invest, until I have enough saved for mortgage down payment?

    Again thanks; @MichaelPlacks @ArronWade @MarianSmith for all your help.

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  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
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    @Michael Trinsey

    See the following: 

    https://www.irs.gov/taxtopics/tc410

    1Reply
  • Michael Trinsey
    OP
    Investor · Clermont, FL · Member since 2018 · 26 posts · 17 votes
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    @George Blower

    George,

    Thanks so much for the link to the IRS site!

    Michael

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