Pension Payout Rollover for Tax-Free for Real Estate Investment?

13 Replies

Hi All,

Is it possible to Rollover a pension payout to a real estate investment account tax-free?

Any direction on this would be greatly appreciated!



You must've received a notice similar to the one i received... Lump sum payout in lieu of waiting for monthly payments upon reaching retirement age. (well that MY situation anyway)

I've been wondering the same thing though. Rollover to IRA, Annuity, or hopefully investment prop...dont want to pay that extra tax though, for sure.

@Stephen Harris & @Tim Kersting

Yes, it is absolutely possible to take the pension payout and put that into real estate investments without incurring taxes.

Self-Directed IRA plans make this possible.

There are a few different business models and various types of providers, and a lot of good information here on BP on the topic.

The basic principal is that a self-directed IRA is no different from any other IRA with regards to tax treatment, it just has a different business model and therefore can be invested in anything the IRS rules allow for, as opposed to being limited to publicly traded stocks, bank savings vehicles or insurance annuities.

An IRA can invest in real estate, and all income produced by the real estate will flow into the IRA.

The caveat is that, just like any other IRA, you have to remain hands off and cannot receive any personal benefit. The IRA is being diversified. If you want to pull out any of the income yourself, you have to take a taxable distribution from the IRA.

@Stephen Harris

Yes thanks to EGTRRA an acronym for the Economic Growth and Tax Relief Reconciliation Act that Congress enacted in 2001.

So YES...the money can be invested through SDIRA, but it would seem a BRRR strategy would not work here?

It would seem if the IRA did invest in a property and then BRRR'd it, the IRA would have to invest in the second property, third, and so on... Eventually, if the individual wanted to take the profits to purchase a property outside of the IRA the extra tax would be applied.

 Am I getting that right?

@Tim Kersting

The BRRRR strategy works just fine in a self directed IRA, and can be a fantastic way to grow your retirement savings.

You are correct that all activities with the IRA will benefit the IRA.

A self-directed IRA is not a way for you to get access to the funds. It is just an alternative way to put that tax-sheltered retirement savings to work and hopefully get better results by investing in what you know.

Thanks for the feedback. Your responses have been very helpful. I've been doing some research on SDIRAs and it seems like a great option for tax-deferred real estate investing. I read that it is possible for an individual to partner with their own SDIRA. Does partnering with one's SDIRA make it possible to invest sweat equity into the individual's share of the investment property? @Brian Eastman and @Tim Kersting

@Stephen Harris

Be careful about what you read. It MAY be possible to partner with your IRA, but this strategy is not without risk. We do not generally recommend such a strategy.

There is an interpretation within the self-directed tax advisory community that an IRA or 401(k) may joint venture into a new project with a disqualified party under the following circumstances:

  1. Both parties enter into a joint venture together – i.e. fund closing on a property together. You would not want to start a project with party A and then bring in disqualified party B six months later when you ran out of capital.
  2. The equity participation in the deal, once established at inception, must not be changed. So if you capitalize with 50/50 funding or 80/20 funding, you must always keep that ratio in all future expenses and income.
  3. One party may not benefit from access to the other parties funds. This is where things get a bit vague and subject to interpretation, and why we urge caution when considering such transactions.
  • Benefit would include things such as one party being enabled to participate in a transaction that under ordinary arms-length scenarios would be out of reach. If both parties “could” do the transaction on their own (including with the use of a non-recourse mortgage) yet “elect” to JV, that is fine. If either party would really not be able to complete the transaction on its own, there is risk this could be viewed as a benefit conferred by the other party and therefore a prohibited transaction.
  • Benefit would also include one party having access to the other parties funds for their own benefit. So if one party is doing the administration of investments, they should frequently reconcile with the other party so as not to incur earnings from idle capital in a savings account, for example.  

This last point is what hangs up most deals. You probably would not JV between yourself and your IRA if you did not have to.

The key issue here is that the IRS does not provide specific guidance on this type of transaction.  If they decided to scrutinize such a deal, they would look at the facts and circumstances of what is being done and determine if any direct or indirect benefit has occurred.  

Thanks @Brian Eastman ! Looks like we're getting into a bit of a gray area, and I'd like to dive even deeper into this gray just to make sure I don't put myself in a bad position down the road. Here's the opportunity i'm currently looking at:

My father is a self-employed handyman and is willing to work on an investment property one full work-day every week for free! He also has the option to get a pension lump sum payoff ($40k) from a past employer. I will be doing a cash-out refinance on my current home to free up some investment capital ($20k). My father and I are trying to utilize our current situation to its maximum benefit. We would love to be able to use his pension payout as a tax deferred means to invest in capital while also utilizing his ability to provide free professional labor (sweat equity) to do improvements. However, we are not sure that this is possible. Here's what we are hoping we can do: 

1. Have my father rollover his pension lump sum payout into a SDIRA

2. I would, as an individual, partner with my father's SDIRA (50/50 split) to secure an investment property

3. Split any labor that we put into the property in half (50% to my father's SDIRA, 50% to me). 

4. Get a quote for the total labor cost.

5. Have my dad's SDIRA pay a contractor/handyman for his half of the labor

6. My dad and I would do the rest of the labor ourselves under my half of the partnership

Would this be a prohibited transaction for my dad's SDIRA? Do you know of any LEGAL way we could use the SDIRA to invest in a property and allow my father to potentially invest sweat equity into that same property?

@Stephen Harris

Time to go back to a blank drawing board.  Your plan does not work for several reasons, most notably the sweat equity component.

A self-directed IRA is a tax sheltered investment plan. In exchange for the tax-favored status, you must avoid any direct or indirect transactions or benefit between the plan and a disqualified party.

A self-directed IRA is no different than any other IRA in terms of how you intersect with it. It is simply a means to take that tax-sheltered retirement savings and diversify into real estate. It is not a mechanism for your father or you to invest in real estate - rather just the IRA investing in real estate.

@Brian Eastman

So it isn't possible to partner with your own IRA? Or is it possible to partner with your own IRA if you don't work on that property yourself (including all disqualified persons)? Not to beat a dead horse, but I'm really trying to understand where the threshold of legality lies.

@Stephen Harris

A self-directed IRA is a tax sheltered investment plan. In exchange for the tax-favored status, you must avoid any direct or indirect transactions or benefit between the plan and a disqualified party.

No working for your plan, whether compensated or not.

No "enabling" your plan via providing access to credit or other personal funds.

Any time the word "I" comes into the picture - other than making decisions or executing transactions - you are probably on the wrong path.

@Brian Eastman

Understood. Looks like we'll be bypassing the SDIRA for now. We don't want any issues with the IRS! Thank you for your help.

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