Real Estate to fund SEP IRA?

Question

Curious if I could purchase a real estate property with an LLC and use the revenue to fund a SEP IRA?  Would it have to be the profit only or could I use all of the gross revenue?  Any hurdles I should think of?  TIA!

Jeff Nash · Answer

@Tim Jernberg you have to have income that is subject to self-employment in order to contribute to a retirement plan like a SEP IRA or solo 401K (self-directed is the most expansive option). As @Ashish Acharya noted, there are ways to convert or transform your income to some extent in order to utilize this strategy from a tax standpoint, but the scale of your operations and cost need to be evaluated.

Ashish Acharya · Answer

Yes, that is possible but not when you start. As you grow, you need to talk to your tax advisor. Your tax benefit from SEP needs to be analyzed vs the cost of changing non-SE income to SE income.

Jeff Nash · Answer

@Paul Vail that is a good idea if his intentions are to just expand his investment options universe and is not as concerned with tax deductions currently.  @Tim Jernberg could use an existing Roth IRA and/or the backdoor Roth IRA strategy (considering balances in Traditional IRAs) and upgrade to a SD Roth.

Dmitriy Fomichenko · Answer

@Tim Jernberg, you are correct, only earned income can be contributed to a retirement plan.

What are you trying to accomplish by converting passive income (which is taxed less) to active income?

Tim Jernberg · Answer

After a little research I realize I can't use passive income to fund a SEP IRA or solo 401k.

I wonder if this would work as an active property manager of the real estate (ie short term rental manager)?  Would you have to pay a salary or have a separate company for the management aspect?

Basit Siddiqi · Answer

The great thing about the SEP IRA starting in 2023 is that they are allowing Roth Contributions.This strategy depends on the individual but I personally like it eventhough it may be 'hurtful' in the start as you are likely reporting income / SE Income.But the good long-term aspect is that you have additional funds in your retirement account which may be tax free or tax deferred.best of luck

Tim Jernberg · Answer

It's a good question.  I had the thought of using it as a way to increase retirement savings potential for my wife who currently does not have the option to invest above a traditional IRA (we are backdoor roth'ing).

Paul Vail · Answer

@Ashish Acharya, @Dmitriy Fomichenko, @Jeff Nash   - could the OP consider a SD-Roth for his LLC and original idea, if they plan on keeping things totally passive?

Real Estate to fund SEP IRA?

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