The rule most people learn about retirement plans, usually in the form of a 401(k), is to put in as much money as possible and have a financial advisor put the savings in mutual funds or stocks until you are 59.5 years old. . old. A CNBC survey found that 63% of Americans are confused about how the 401(k) works.
Most people don’t realize how to use retirement funds to invest in real estate. Part of the reason many financial advisors don’t recommend it is that they aren’t familiar with real estate investing. A licensed advisor makes money by selling you stocks and insurance, but they don’t make money when you take your money and put it into real estate. That said, some fiduciaries will monitor your portfolio for a fee and make those recommendations.
I have been investing in real estate as part of a retirement plan for years. A certified financial planner (CFP) I hired more than 20 years ago introduced me to the concept. He advised me to buy real estate within my plan. Over the years, I’ve learned more and more about the underutilization of retirement plans and how confusing they can be to understand. I learned that the CFP I was using then gave me half the information I needed to take full advantage of it.
That said, I am not a licensed fiduciary or CPA. I recommend that you review the details of these recommendations with them. The laws are complex and sometimes even licensed professionals have different interpretations of the rules. You want to make sure your CPA and financial advisor understand and support real estate investors. The best access to knowledge and potential benefits is your ability to ask the right questions and explore your discoveries.
Read the rules first
As an investor, you know how important it is to read all documents carefully. Usually there is a plan provider that handles the execution of the documents for a reasonable fee and the business owner just needs to sign these documents to “adopt” the plan.
Each retirement plan varies and the provisions will determine your options. If you are the business owner who writes your company’s plans, you are in the best position to create documents with the most flexibility for investment benefits.
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Make your plans to be self-directed
Several tax-advantaged vehicles include a defined benefit plan, a 401(k) profit-sharing plan, solo 401(k), employer-sponsored 401(k), traditional IRA, and Roth IRA. With each variation, all documents should allow you to invest your money on your own initiative so that you can invest in real estate. Once you’re self-directed, you can keep alternative investments in your retirement account.
A defined benefit plan is an employee-sponsored retirement plan that is regulated by the Employee Retirement Income Security Act of 1974 (ERISA) and the IRS. They offer higher fees to defer earnings based on how much your business makes and are more complicated to set up. Annual government forms are required for all plans if you have pension assets in excess of $250,000.
If you have a business with no full-time employees other than your spouse, you can set up an individual 401(k). Writing these plans with a maximum amount of flexibility will give you many benefits, including the ability to write checks. Writing a check gives the plan owner full signing authority over an account that provides access to their retirement funds. With the writing of checks, the individual monitors his own activity.
W2 employees may also be able to manage their own funds. If your employee plan prohibits it, you may still qualify for a sideline solo 401(k) or a self-directed IRA LLC if you have money from past employment. Previous employee funds allow you to transfer them into a self-directed IRA and make real estate investments through your IRA. There are no penalties or taxes associated with the transaction as long as you only move retirement money to another retirement account.
Find out how your plan is set up and remember that there are still benefits to early retirement. You can use a company match, or if you qualify for a Roth 401(k) and the company offers both, you can grow your investments tax-free.
Borrow from your subscription
If the plan documents allow it, and many of them do, you can borrow up to $50,000 in acquired funds or 50% of your balance. So if you have $80,000, you can borrow $40,000. If your spouse as an employee is an established plan participant, they can also borrow up to $50,000.
The borrower must repay within five years, but the installments of the fully amortized payments are due at least quarterly. The interest rate can vary, but essentially you pay back the loan to yourself (your retirement plan) at an average interest rate of 1.5% plus prime. You can also take out follow-up loans before repaying the original loan, depending on the balance and again if the plan allows.
Get a bank loan within your retirement plan
Getting a bank loan within a retirement plan is not very common. A Google search turns up almost no information on the subject, and I’m not surprised that a CFP on my payroll told me it wasn’t possible. But I’ve since learned that, depending on the plan documents, it does.
Here’s how it works. The lenders qualify your eligibility using an LTV of 60-65% (this is the standard rate, but it can fluctuate moderately) and see how much is in the retirement account to get the loan. Only certain banks offer these loans; NASB is one of the most popular.
Retirement plans have many prohibited transactions to consider in the loan, including not allowing disqualified individuals to benefit, i.e. yourself or an immediate family member. A disqualified plan pays hefty fines and loses benefits.
Loan rates are higher (about 5-6%), and flippers are vulnerable to UBIT tax, but other than that, it’s a viable loan option.
You can even use a 1031 exchange. All pension funds, unless taxes are paid, remain within retirement plans and the funds remain tax-deferred. A disadvantage is that there is no possibility to record amortization, but a bonus is that the loan application is also only two short pages.
Have your subscription paid out permanently
Some respected CPAs and real estate investors argue against having a 401(k). Robert Kiyosaki once wrote, “The 401(k) has robbed Americans for over 40 years now,” declaring, “I would never invest in a 401(k).”
Kiyosaki believes more money can be made when people build a real estate portfolio outside of a tax-deferred plan. Within a plan, your tax liability continues to increase with no depreciation benefit. You are also subject to changing laws. He outlines his theory in his recent book Who stole my pension?
You have the option to take your money completely out of the 401(k) and invest in real estate with after-tax dollars. Getting rid of your 401(k) can be an aggressive move because if your investment doesn’t work out, you won’t have a pension now either. You are also subject to a 10% penalty on top of paying tax on all money if you withdraw it before the age of 59.5.
You’ll want to do a cost analysis and talk to professionals before taking action to say goodbye to your retirement plan. That said, you grow all your money with pre-tax dollars in retirement plans. At some point you will have to pay unless you have a Roth IRA or Roth 401(k).
Pay for properties cash within the plan
Paying for a property in cash within your self-directed plan is a fairly straightforward process. If you have confidence in real estate and its ability to give you stable returns and valuation over time, this is a great option. I have used this strategy several times to make significant profits over the years. If you don’t have a lot of money in your plan, you will want to find partners or get a loan as described above.
Invest in syndication deals
Syndication deals are another form of collaboration in deals and are often passive, so you don’t have to do any heavy lifting. The ability to use qualified self-directed funds makes it very easy to grow a retirement account, maintain a solid position in real estate, and earn potentially high returns. Syndications are big deals that are put together with multi-family parks, mobile homes and storage units. Depending on the offer to participate, you may need to be an accredited investor. The sponsor organizing the investment will let you know the minimums and requirements. All proceeds and revenues must remain within the plan.
Taking advantage of your retirement funds through self-directed plans can be a game-changer when expanding your portfolio, as long as you weigh all the variables, run the numbers, and make sure your documents allow it.
Statistics show that most Americans today are not saving enough to retire. While a big part of the problem can be that people can’t afford to save, those who don’t always know how to maximize the return on their savings by investing that money in real estate.
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