You can invest your 401(k) in real estate when you establish a Self-Directed individual retirement account, such as a Solo 401(k) or a Roth Solo 401(k) for real estate. When we say "invest your 401(k) in real estate", we are not referencing a traditional, employee sponsored 401(k). In fact, you cannot use your 401(k) to invest directly in real estate. You can use a Solo 401(k) if you're a small business owner with no employees or a self-employed individual.
Prior to purchasing real estate, you must first establish a self-directed Solo 401(k) plan.
Gain the ability to make traditional investments, such as stocks, but also all IRS approved alternative asset investments, such as real estate.
Invest in what you know and understand without tax, such as real estate, precious metals, tax liens, hard money loans, private businesses, and much more.
As trustee of the plan, making an investment is as easy as writing a check or executing a wire transfer.
Investing is as easy as writing a check!
Let’s go straight to the benefits.
Of course, you don’t need an LLC for your self-directed 401(k) to buy real estate. The Solo 401(k) Plan itself can take title of the property. In other words, the plan can own the property.
There is no requirement to establish an LLC with your Solo 401(k) Plan funds. However, buying real estate under an LLC provides asset protection. Solo 401(k) owns the LLC, and the LLC will own the property. And you’re the manager of the LLC. As manager, you have full control over your investments.
Partnering with yourself or another disqualified person in connection with a retirement account investment could trigger the IRS prohibited transaction rules.
If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed by the retirement account holder or any disqualified person and whereby the lender’s only recourse is against the property and not against the borrower.
If using a nonrecourse loan to purchase real estate with a self-directed IRA, the unrelated business taxable income (“UBTI”) rules could be triggered and a tax rate reaching as high as 40 percent could apply. Note – an exemption from this tax is available for 401(k) plans pursuant to IRC 514(c)(9). If the UBTI tax is triggered and tax is due, IRS Form 990-T must be timely filed.
Joe’s Self-Directed IRA LLC would be as follows: XYZ LLC. Whereas, if Joe Smith established a self-directed IRA with ABC IRA Trust Company (custodian), and the custodian purchased the real estate directly on behalf of Joe without the use of an LLC, then title would read: ABC IRA Trust Company FBO John Doe IRA.
Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in.
Beware of fraud if purchasing real estate from a promoter.
If using a self-directed IRA LLC to buy real estate, it is good practice to form the LLC in the state where the real estate will be located to avoid any additional filing fees. Also, be mindful of any annual state LLC filing or franchise fees.
Using retirement funds to buy real estate can offer retirement account holders a number of positive financial and tax benefits, such as a way to invest in what one knows and understands, investment diversification, inflation protection, and the ability to generate tax-deferred or tax-free (in the case of a Roth) income or gains. The list of helpful tips outlined above should provide retirement account investors looking to buy real estate with a guideline of how to keep their retirement account from running afoul of any of the IRS.
After the 2008 financial crisis, people became wary of Wall Street. They didn’t feel comfortable making traditional investments they didn’t fully understand. Individuals, particularly those in the middle class, didn’t know what was happening in Wall Street. As a result, they became skeptical investing their retirement funds in traditional assets.
Real estate, however, is something most us feel comfortable with – lower class, middle class and upper class alike.
Many people worry about inflation, which is another reason they turn to real estate investments. Even if the risk of inflation isn’t real (it may or may not be), inflation can seriously hurt a retirement portfolio. The value of currency today may be worth significantly less tomorrow. Hard assets (real, touchable assets) is a way to protect your retirement plan against inflation. In a way, hard assets act as a buffer against your retirement assets and the havocs of inflation.
A simple, yet informative handbook, Going Solo: America’s Best-Kept Retirement Secret for the Self-Employed was written to help small business owners and self-employed individuals discover the many advantages of establishing a Solo 401(k) Plan.
In an effort to eliminate the complexity of how one can establish an individual 401(k) plan, Adam Bergman wrote Solo 401(k) in a Nutshell. The book “…simplifies the process (of establishing a Solo 401(k) while…providing everything one needs to maximize their retirement assets” and gain financial freedom.
I want to self-direct my 401(k)! Call us at 800-472-0646 or fill out the form and we can help you.