Getting started investing using my retirement funds

9 Replies

Hello - I've been looking to get started in the real estate investment business for a while now.  My goal is to create a cash-flow generating portfolio for my family and break free of the "corporate slavery" we deal with daily.  I have an idea on how to make this work initially but would like some insight.

We have a sizeable amount saved in my 401k from my previous employer, plus we each have a small pension from a couple closed out plans.  I would like to convert this into either a SDI or possibly 401(a) pension plan and use that plan to mortgage the investment - basically be my own bank.  The investment would be repaid using a standard mortgage promissory note at whatever interest rate is acceptable to generate income for the SDI/401(a), but the income from the property would be my cash flow.  This prevents me from losing a sizable portion of my 401k due to taxes if I cashed out now, and allows me to leverage money that is currently sitting in stocks/bonds/mutual funds.  I don't think I would throw all of this into real estate but instead stay diversified across the board.  

This seems like a smart plan on paper - but would this type of double-dipping be allowed by the IRS?  Can we bring other family members into the fold later if they wanted to get involved?

@Chris Libby

You may not do what you propose.

While a self-directed IRA is capable of investing in real estate and holding mortgages, the IRA may not transact with you or close family viewed as "disqualified parties" by the IRS.

If the IRA is investing in real estate, it is all about diversification for the IRA. The IRA owns the asset, pays the expenses and receives the income.

@Chris Libby

Congrats on realizing you want to get out of the rat race. Don’t gove up hope-where there is a will there is a way. There are strategies that can be employed using your retirement funds and getting distributions without penalties. However there is more info required-your age, the investment amount, the value of your retirement plans now, do you need the $$now, exit strategy etc. Talk to your professionals for more ideas (72t distributions, non recourse lending, etc). PM me if you need other ideas  to discuss. Remember self dealing and dealing with disqualified persons is the fastest way to pay penalties and taxes as @Brian Eastman explained. 

@Brian Eastman is exactly right.  What you could do is find a fellow investor and you fund their business and they fund yours.  Both IRAs benefit, both businesses benefit.  While offspring and ancestors are prohibited persons whereby you cannot transact with them, a sibling is not.

@Joe Tomko

Actually, I said nothing of the sort, and what you propose would also be a prohibited transaction.

IRS rules prohibit any direct or indirect transactions or benefit between an IRA and a disqualified party. Any kind of quid pro quo arrangement such as you outline, the IRS would see right through that as a scheme for you to get access to your own IRA money. The tax penalties are severe.

There are, however, many entirely safe and legal ways to diversify your retirement savings and participate in opportunities other than the stock market.  That is what self-directed plans are designed for.

@Brian Eastman, this is the first I've heard that a quid pro quo arrangement is prohibited.  I apologize, I didn't seque well enough from supporting your statement to then adding my own.

@Chris Libby

The solo 401k or IRA investments would need to benefit the retirement account not you personally. Therefore, the income generated from the trust deed investments would need to flow back to the retirement account.