All Forum Posts by: Josue Vargas

If you move to a self-directed 401k that will have the same restrictions about withdrawals as a "normal" 401k meaning that you can't take any distributions until you are 59 1/2 and, if it's not a ROTH 401k, you will pay taxes. So this would not be good if you are looking for immediate cash flow and are not over 59 1/2. Also, if you are considering buying real estate in a self-directed 401k please keep in mind that you do not get several of the important tax advantages such as being able to take depreciation or write off expenses against revenue. The rental house is just another asset like a dividend stock that will (hopefully) provide periodic income and long term appreciation.

If you gained $10K in the past 13-months, would you still consider withdrawing from your tax-deferred account to control your money?  Think long-term.

I would look for more than $600 annual cash flow.  

@Josue Vargas

I have to agree with @Karen O. That the penalty and tax hit would be a significant loss. I would be happy to provide you with more general information on self-directed retirement accounts - they allow you to do exactly what you want!  

1. What are your plans with this property you have lined up?
2. Do you plan to rent it out,  and to who?
3. Do you plan to fix it up, and who is doing the labor?
4. How much do you expect the property to cost (purchase price +renovations)? 
5. Does your 401(k) have enough to cover that?
6. Did you know your self-directed account can partner with other monies for a deal?
7. Did you know your self-directed account can obtain a non-recourse loan?

The reason for these questions is to find out if you plan on doing anything with your investment that would be considered prohibited by the IRS. If you plan to use the property strictly for an investment this might be a good way for you to have more control of your retirement investments and possibly make a higher return - the return is at your due diligence, a key part of self directed accounts is that the account holder (you) is responsible for investment choices. You must do all the due diligence to ensure you are making the best decision on what to invest in. 

Josue, a 1031 exchange applies when you sell a rental property and purchase another for investment purposes. Keep in mind that certain conditions must be met. For example, the new property must be purchased no later than 6 months after selling the current rental. You also have 45 days to identify the property for the exchange.

@josue vargas, If you ask my husband, he'll say "it is the time to sell!". If you have lived in the property for at least 2 of the 5 years previous to the sale, then you wouldn't even have to worry about paying taxes on the 90k gain. You could sell, move to the new city, rent while you find something you like, and maybe by the time you find something, prices would have adjusted down a bit.

Note: Remember 1031 exchanges apply to rental property.

Good luck!

-Ana

@Josue Vargas With regard to the benefits of putting money into your 401k etc, I was talking mostly about shielding your influx of cash from income taxes. If the income you're referring to is all in your ESOP, you have some options. The first thing to consider is your vesting. If you are not 100% vested in your ESOP (check your plan docs to see what the vesting schedule is) and you're not set on leaving your job right now, it might be better to sit tight for a while until you get to 100%.

Once you do leave, and since you're not 'retiring' from the employer, just leaving, you can leave your ESOP where it is for up to six years (I believe, any retirement pros out there feel free to correct me here!). Then you can take equal annual (or more frequent) distributions for up to five years, which would spread it out a bit. You can roll these distributions into a traditional IRA or 401k to avoid taxation (if you go Roth you have to pay income taxes now, but not when you withdraw). If you take any of the ESOP distributions as cash, you'll pay income tax PLUS a 10% penalty if you're younger than 59.5 years old. Here's a resource for ESOP basics, distribution and rollover rules:

https://www.nceo.org/articles/esop-participant-dis...

Depending on how you take distributions, you could build up your retirement accounts over time and invest in REI through those accounts as well as outside. You've got a lot of moving parts, but also a lot of options. (Also, just to be clear, investing in real estate through an SDIRA isn't a loophole, it's a legitimate strategy. You'd need guidance, and it isn't right for everyone, but don't feel like it's something you shouldn't pursue because the IRS will see it as 'cheating')

In the end, paying a lot of taxes, while annoying, just means you're doing well - you have income or your investments are producing profit. And taxes are what is necessary to have, like, roads and schools. That being said, if you're looking at a large windfall, you may be surprised at what your tax bill turns out to be, and that money could be put to better use in investments and planning for your future.

If your retirement is pretty well set up, then yeah you might also look into a 529 plan to pay for your son's tuition etc. If your retirement funds/strategy are lacking, then I'd focus on that first (between the two) because an even better gift than free tuition is not having to support your parents when they're old and need care. Talking to a CPA about what tax and investment strategies will put your capital to work is honestly your first step. There are so many moving parts here with your ESOP, 401k, and the potential use of an SDIRA, that you just need professional advice - I am but a humble turnkey provider ;)

If you want to hang onto cash for investment, then I'd say make it the $90k from the sale of your property, since that's tax-free already. Worst case scenario it sits in your checking account not earning interest. It's the additional income you're looking at that needs to be strategized. But again, a tax bill just means you made money, which is never something to complain about! Start from that attitude and then see what you can do to whittle that bill down with strategic allocation and deductions.

If you're invested in the stock market, you might also talk with your CPA or an investment advisor about the possibility of using a tax-loss harvesting strategy to lock in taxable losses on stocks that have dropped in value and then replacing them with other highly-correlated stocks to preserve your market exposure. It isn't for everyone, but it is simpler than it sounds, it just takes planning. Here's a quick rundown of the strategy:

http://www.investopedia.com/articles/taxes/08/tax-...

I don't have a CPA rec for you, sorry, since I think it's something you have to feel out for yourself. Someone that you're comfortable with, who is happy to answer questions, and who can explain things in a way that makes sense to you. There are several threads here about CPA selection, so this might give you some good ideas about what to ask and what to avoid:

https://www.biggerpockets.com/forums/51/topics/704...

https://www.biggerpockets.com/forums/48/topics/401...

https://www.biggerpockets.com/forums/51/topics/119...

OK I have GOT to get off BP for the day - such a black hole, this place! 

Since it sounds like professional help is the first order of the day, use BP to suss out some recommendations from investors who have more experience with the types of investing you're looking at, or start a new thread asking for recs.

Best of luck!