10k in IRA account, what should i do with it?

Question

What would you guys do with 10k in an IRA account, what Ive been observing is i kinda have to jump into it unless i will never feel content with the information i have learned. I don't know much about real estate but I believe if i was to purchase  something, it would teach me better than reading books. Oh, and i live in MA ridiculously high cost of living. I would like to do under duplex triplex or quadplex.

Mark Nolan · Answer

@Stephen Igbeka

Maybe invest it in tax liens through a self-directed IRA or solo 401k.

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

• Both were created by congress for individuals to save for retirement;
• Both may be invested in alternative investments such as real estate,  precious metals tax liens, promissory notes, private company shares,  and stocks and mutual funds, to name a few;
• Both allow for Roth contributions;
• Both are subject to prohibited transaction rules;
• Both are subject to federal taxes at time of distribution;
• Both allow for checkbook control for placing alternative investments;
• Both may be invested in annuities;
• Both are protected from creditors;
• Both allow for nondeductible contributions; and
• Both are prohibited from investing in assets listed under I.R.C. 408(m).

The Self-Directed IRA and Solo 401k Differences

• In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
• To open a self-directed IRA, self-employment income is not required;
• In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC)  must be utilized;
• The solo 401k allows for checkbook control from the onset;
• The solo 401k allows for personal loan known as a solo 401k loan;
• It is prohibited to borrow from your IRA;
• The Solo 401k may be invested in life insurance;
• The self-directed IRA may not be invested in life insurance;
• The solo 401k allow for high contribution amounts (for 2016, the  solo 401k contribution limit is $53,000, whereas the self-directed IRA  contribution limit is $5,500);
• The solo 401k business owner can serve as trustee of the solo 401k;
• The self-directed IRA participant/owner may not serve as trustee or  custodian of her IRA; instead, a trust company or bank institution is  required;
• When distributions commence from the solo 401k a mandatory 20% of  federal taxes must be withheld from each distribution and submitted  electronically to the IRS by the 15th of the month following the date of  each distribution;
• Rollovers and/or transfers from IRAs or qualified plans (e.g.,  former employer 401k) to a solo 401k are not reported on Form 5498, but  rather on Form 5500-EZ, but only if the air market value of the solo  401k exceeds $250K as of the end of the plan year (generally 12/31);
• When funds are rolled over or transferred from an IRA or 401k to a  self-directed IRA, the amount deposited into the self-directed IRA is  reported on Form 5498 by the receiving self-directed IRA custodian by  May of the year following the rollover/transfer.
• Rollovers (provided the 60 day rollover window is satisfied) from an  IRA to a Solo 401k or self-directed IRA are reported on lines 15a and  15b of Form 1040;
• Pre-tax IRA contributions on reported on line 32 of Form 1040;
• Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
• Roth solo 401k funds are subject to RMDs;
• A Roth 401k may be transferred to a Roth IRA (Note that from a  planning perspective, it may be advantageous to transfer Roth Solo 401k  funds to a Roth IRA before turning age 70 ½ in order to escape the Roth  RMD requirement applicable to Roth 401k contributions including Roth  Solo 401k contributions and earnings.);
• Roth IRA funds are not subject to requirement minimum distributions (RMDs);
• The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
• The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
• At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
• At termination, the self-directed IRA is only required to file a form 1099-R.

Christopher Giannino · Answer

I think at this point you should leave the 10k in the IRA account and let it grow.  Like @Peter Mckernan said,  get a side hustle, start saving up money and think about creative ways to finance deals.  Next, I would determine what avenue of REI you really want to pursue... wholesaling, buy and hold, fix and flip, ect.  Read as many books, articles and listen to the podcasts and learn everything possible about that specific area of real estate.

Although yes I agree that if you just bought an investment property you would learn as you go but I personally believe that in order to be successful you should have a certain level of knowledge first. Use BP to gain that knowledge and then jump on in!

Peter Mckernan · Answer

Hello @Stephen Igbeka

If I were you I would super creative about raising money, or increasing your income with a second side hustle to get that first cash for a downpayment. I would leave the cash you have in the IRA and focus on getting extra cash somewhere else. The 10K could be raised quickly in other avenues.

Stephen Igbeka · Answer

I haven't really looked into notes @Kevin Moen, still reading books on rental properties atm.

Kevin Moen · Answer

@Stephen Igbeka Is this a self directed retirement account you are referring to?

If so, and I assume that would mean your cash is not currently growing if its sitting idle in a SD IRA, is that also correct?

Personally I buy notes in self directed retirement accounts, and real property with cash. You lose the benefits of leverage when you invest in real estate with an SD IRA, and if you do leverage the purchase you have to put a huge % down, and get a non recourse loan. So I invest in notes with my SD IRA for a nice return, and use cash and leverage to buy RE. This way I get to take the interest as a write off, and have less negative consequence with taxes vs buying property with a SD IRA.

You can find partial notes for $10k to invest in and make a good 6% to 8% return.

Peter Mckernan · Answer

@Stephen Igbeka

Yes, keep the money in the IRA account and let that grow. You can stop for the time being and put the money you would be putting into the IRA into your bank account for the next investment you are looking for.

So, if you are putting $500.00 a month into your IRA and now you want to start to fully invest in real estate, stop the investment into the IRA, let that money in their sit and grow, and then shift all the savings to your real estate investments. I would also add a side hustle that will create an even bigger income stream to save and grow that money to invest that money quicker!

Stephen Igbeka · Answer

Thanks guys! Alot of info, much appreciated, brandon's book on rental property investing just came in today... CrammingDABasics!

Matt Madalis · Answer

As the above posters mentioned, you do need to have a certain level of knowledge about real estate investing before jumping.  Also want to have an understanding of the market where you plan to invest.  You mention you have 10K to invest in a duplex, tri-plex, or quad-plex and that MA is expensive.  I don't know that market, but I'm guessing $10k may not be enough of a down payment of those types of units.

Investing with IRA funds also adds a level of complexity due to prohibited transactions, among other things, and may be best to save that approach once you get more comfortable investing with non-IRA funds.

Its always good to find local REIAs or meetups.  Partnering or working with an experienced investor would be a great way to gain knowledge.

Stephen Igbeka · Answer

I just started so your answer seems kind of vague, keep the money and work or somehow raise money to add it to a down payment? Thats what you are saying?

Stephen Igbeka · Answer

I would like 2-4unit building

10k in IRA account, what should i do with it?

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