Using 401K Money For Real Estate
I have 2 401K plans from previous jobs with $80K in before tax money. I am considering using this money to invest in a shore property with two other partners. The area is a hot bed investment wise as these property values are skyrocketing. I know I would be hit with the 20% federal as well as the 10% tax penalty before age 59 1/2. Anyway around the tax issues here? Any other options? 
Talk to your 401(k) administrator. If these plans are from previous jobs, maybe you can roll the money (tax free) into a self-directed IRA.
Once the money is in your IRA, form a limited partnership with your other partners. Let your IRA purchase shares as a limited partner in the LP with the IRA money.
Thx Dave for your quick response.
I have checked with 401K admin and I can move the monies to a self-directed IRA. Can you explain how the LP idea you described works? What tax implications are there if any?
Thx
I was just planning on taking a hit tax-wise on pulling funds from my 401K to start REI, and was surprised to call my 401k company to find that they'd simply loan me half of my invested $ as a 4% APY loan! MUCH better than getting a hit on my taxes. Yours may do the same thing - just ask.
I read an book about it from Mr Rice name begins with IRA wealth.....
There are actually some other books about it in book stores you can check.
If I'm not wrong you can use direct IRA for buying that property tax free and without penalty. But there are some rules. You can't use that home as your primary home until you retire, but you can give it to rental.
You can use an IRA to invest in real estate and yes there are rules - I believe they vary according to state. For instance, if you have someone manage the property, they cannot be a family member.
Call around to investment bankers and see if anyone will give up information over the phone or knows someone who can set this up for you for minimal fees.
What you need to do first is roll the money into an IRA using a firm to administer that. As long as you have a firm behind you, they can handle the details of funding an escrow for the property. The IRA can also fund any expenses associated with the property, capital or otherwise. The only catch I believe is once you sell the property or any monthly income you receive from it has to go directly back into the IRA. Hope this helps! [ Edited by MNInvestor on Date 03/12/2004 ]
You don't have to take a hit by pulling money out of 401k and then invest in RE. That would be stupid. Sure, you can borrow.
Better yet, you can open a self-directed IRA and invest in RE. Companies like Pensco and Midohio do it.
WOW Please elaborate a bit more- I cashed in 1 IRA to buy my first house and used part of another for down pmts on 3 other props and just figured I would take th hit and hope fully the depreciation would offset the income and I might be able to avg the withdrawl over 10 years so it would not be so bad.....But I did not file yet for last year and I am all ears!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
This is a great topic!
Now, I am not a CPA or a lawyer but this is my personal experience as the general manager of a limited partnership:
Anyone can do this. You simply "roll" your 401K money into a self directed IRA. Take care in selecting a custodian as they are all not the same nor do all custodians handle these types of transactions. The fees are all over the board.
The tricky part is that you cannot invest your IRA money in a limited partnership of which you are the general manager. Your IRA custodian will puke all over you for that one.
That being said, you need to find a general manager for your limited partnership. That's a pretty safe bet because your custodian will subject you to some pretty precise rules about HOW monies are disbursed from your IRA for acquisition and rehab costs.
That's really about it. The rules are federally mandated so the only thing the state can control is how much they charge to register your partnership. In Texas it is $750 - YOUCHIE!
The benefits can be great for an IRA Investor and I would be sure, if you don't know what you are doing, to consult a securities attorney whcih can be expensive. I've been doing my own LP's for about ten years now so my atty. just gives it a little "smell" test.
Good Luck!
C-
A good resource FREE to anybody, is IRS Pub. #590, on IRAs, self directed & otherwise.
Just find, on IRS site & print if desired. About 100 pp. so make sure you've got some paper!
Or, IRS office has these, free, one per customer.
Self directed IRA (SDIRA) rules do not vary state-by-state, are controlled by Int. www.Rev.Code & rules & regs only.
Thx to all for the info. It all been helpful. I am seriously consideriing the SDIRA for RE.
I have researched some custodial companies on the internet. EquityTrust, Entrust, Pensco and Sterling Trust seem to be at the top of the list. Anyone had any experience good or bad using any of these folks? Any recommendations?
Thx