401k to Self-Directed IRA

7 Replies

Hi everyone! I have a 401k from a previous employer that I would like to transfer to a self-directed IRA instead of my new employer's 401k plan. My hope is to be able to invest in syndication opportunities. I do have a few questions though:

1. Would you recommend it?

2. Can you invest in syndication with SDIRAs? 

3. Are there fees associated with the transfer of money to the SDIRA?

4. What are some good companies that you have used and would recommend?

I've tried to look this up extensively but never really seem to get the answer I am looking for. Really would love to hear from your experience and expertise. Thanks!

Yes, you can do it. Yes, there are costs associated with setting up and maintaining a SDIRA. While there are many on BP that will disagree with my, I wouldn't go this route. I've taking money out of my IRA, paying taxes and penalty, to invest in syndications. Why?:

  1. When investing in real estate through an IRA it is very possible you could end up paying more in taxes than if you pay the taxes and penalties to take the money out. When done correctly, real estate investing can already be done tax-free (or more correctly, tax-deferred, but the tax can be deferred indefinitely, including the day after you die and your heirs inherit it without paying tax)
  2. The cash flow and profits can be used however you choose without penalty.  When in an SDIRA, the profits need to go back to the SDIRA.  Of course, you could take them out after they are deposited, but then you will pay the taxes before you can use it.
  3. My bank doesn't charge me fees for my account but an SDIRA will.
  4. Overall, less paperwork.

Hey there Karen, I'd love to help add some info to what Greg said! I agree, different strokes for different folks! Personally, I love SDIRAs investing. 

1. Would you recommend it? - I absolutely would. I've seen first hand how lucrative commercial SDIRA investing can be. Depending on what type of account you have (like a Roth IRA), you could potentially be growing tax-free funds. So, when you take your funds out at retirement, as long as you meet a couple requirements, you'll be taking out tax-free money. Why not grow your acorn to become a tax-free money tree?! That's how I like to look at it. There are some cases, like Greg mentioned, where your IRA can incur taxes. In most cases, there are solutions!

2. Can you invest in syndication with SDIRAs? - Yes! That is actually a very common investment that SDIRAs get involved with. I've seen a lot of accounts receive nice dividends back to their IRA with this strategy. You can also invest in many other private assets, if you choose.

3. Are there fees associated with the transfer of money to the SDIRA? - There will be, yes. Depending on custodian, fees will very. One thing I would say here... don't let fees be your deciding factor! Look at how experienced the company is, if they provide education (typically if they can teach it, they understand it), and also how they treat their clients. I've heard of some custodians that take up to 2 weeks to funds deals, whereas others can fund within 24-48 hours. You definitely get what you pay for when you choose your custodian.

4. What are some good companies that you have used and would recommend? - Unfortunately, I cannot recommend any companies, as I myself work for one. But I am more than happy to answer any more questions you may have!

We have many clients who invest their IRA's into syndications. There are costs associated with setting up and maintaining an IRA. There are costs when making investments. One thing to keep in mind when in investing with real estate companies, is that there is an IRA called associated with the investment if the real estate company is using financing. You should discuss that with your tax advisor.

@Karen C.

Yes, you can invest in syndications with self-directed IRA. Most syndications use leverage so that would expose your IRA to UBIT. See if your are eligible for self-directed Solo 401k instead which would not be subject to UBIT on leveraged real estate. 

I personally prefer to do private lending with my retirement funds (interest income is tax-free/tax-deferred since I use both pre-tax and Roth) and use my savings to invest in syndications since they provide tremendous tax benefits (I need those now).

@Mike Mosby   The really big picture will require a much more massive spreadsheet.  You are looking at just one aspect of the issue, taxes you would pay if you took it out now.   Add in some of these other factors and see which is more beneficial:

  • Outside an IRA, I have access to a much wider variety of investment options because I can invest in things that I can actively manage, such as a house or small apartment, so I have access to higher returns than someone investing in an IRA.
  • Some of the highest returns out there are in real estate, but real estate returns are not that great if the asset is unleveraged. Leveraged real estate investments in an IRA pay UBIT tax that I do not have to pay
  • My real estate investments kick out lots of cash, and I have structured my business so I do not pay income tax on that cash. No matter what you invest in, when you pull cash out of an IRA, you WILL pay ordinary income.
  • Related to that, What is the value of having access to cash?   It would suck to have a medical problem, need cash, and then pay a huge tax right when you need the cash the most.
  • What does the IRA look like to your heirs after you die? My real estate can get sold off at a stepped-up basis, so all those potential taxes I had been kicking down the road evaporate. Nobody pays them when my investments are OUTSIDE an IRA.

Now that we know how to invest successfully in real estate, we have no hesitation paying the tax to remove funds from our IRA and invest them outside the IRA. FWIW, my wife worked 20 years in corporate Finance at a Fortune 50 company and is totally on board with this idea.