401k To Start?

Question

Hello, all.  I'm new to the forum and looking for feedback on using my 401k to start flipping and buying rentals.  I've been a licensed broker for 13 years and I've only purchased and sold one investment.  Thanks for your feedback!

Justin Windham · Answer

@Joe Daiker Welcome to Bigger Pockets! Glad to see you're getting some good responses already.

Terry Beall · Answer

I would definitely seek competent counsel on this matter.  Tell them what your goals are and what you are trying to accomplish.  Sorry, couldn't do better than this!

Virginia H. · Answer

I apologize for not being more clear. However, thank you for properly diagnosing my question and answering in an easy to understand manner.

Brian Eastman · Answer

@Virginia H.

When you as:

"Is this ONLY in cases of a Solo 401K or is the general rule of thumb? ", what in particular about my post are you referring to and what are you considering "general"?  It it not entirely clear what your question is.

Taking a shot in the dark, Unrelated Business Income Tax (UBIT) applies whenever a tax exempt entity (Solo 401k, IRA, or any other type of non-profit) engages in a trade or business on a regular or repeated basis. refer to IRS Publicaton 598.

Income derived from passive investments such as rent from real property, interest, dividends and royalties is not subject to such taxation.

UBIT was created by congress long before IRA and 401k plans existed, to prevent tax-exempt entities from driving taxpaying businesses out of business.

The trust tax rates are pretty steep, but you can still in some cases generate higher ROI for your IRA or 401k flipping houses and paying taxes than you might in other passive investments.

Ray Arends · Answer

@Joe Daiker

Rentals better suit my goals Joe. I do appreciate the opportunity flipping provides though.

Joe Daiker · Answer

Thank you for the feedback.  You've given me something to think about.  I'll have to research the type of 401k I have to better understand my options.  Ray, did you start with a flip or rental?

Virginia H. · Answer

Is this ONLY in cases of a Solo 401K or is the general rule of thumb?

Ray Arends · Answer

@Joe Daiker

Welcome!

I borrowed money from my 401k to purchase my first buy and hold rental property. Even after considering lofty ( to me) ideas as 'lost opportunity cost', I decided this was the best option for me because it allowed me to get started. It also allowed me to diversify out of  strictly stocks and bonds that were the only investment options available through my 401. I believe investment diversity is a good thing.

The loan was limited to 50k and no more than 50 percent of the balance of my 401 could be borrowed. Obviously this is a loan and therefore must be paid back. At the maximum term of 5 years, the payment is steep. Also, if I leave my job, I believe the loan becomes due and if I don't pay it I believe I am subject to a 10 percent penalty as well as a the balance considered income and therefore taxable - basically an early withdrawal. This is just my understanding and you should definitely consult with a professional before taking any action.

My only regret is not having done this sooner!

Good Luck!

Brian Eastman · Answer

@Joe Daiker

The Rollover as Business Startup what Mark mentions appropriate if you are looking to personally start a real estate development company and produce current income for yourself.

If your goal is to achieve better tax-sheltered growth for your retirement savings by investing in what you know, a passive Solo 401k would be a different approach.  In the Solo 401k, all returns go to the plan and your role needs to be kept at arm's length and administrative in nature.  Flipping houses regularly in such a plan does incur tax known as UBIT since the tax exempt entity is conducting a business and competing with taxpaying businesses as opposed to just making passive investments.  Being a hard money lender to developers/flippers is passive and not taxed.

Ultimately the right solution will depend on your goals, and speaking with a professional in the field as well as your licensed tax advisor will be the best way to get a handle on your options.