You Can Buy Real Estate With Your IRA or 401K
Tired of seeing your retirement nest egg evaporate? Can't qualify to buy investment properties? Good news! You can make your IRA or 401K truly self-directed and purchase land, residential real estate, commercial properties, make mortgage notes, buy trust deeds, fund LLC's, or just about anything except collectibles and S-Corps. Your profits go directly back into your retirement account, even tax-free if you have a Roth IRA or Roth 401K.
This form of retirement investing has been available since IRA's started, but is getting renewed attention what with the stock market roller coaster ride of late. Be aware that the big brokerages might tell you that it's illegal to make your retirement self-directed (mine did). But that is incorrect!
There are rules that you must follow. The IRS has ruled that your self-directed IRA or 401K can't invest with yourself, your spouse, or direct descendents. Step-relatives are allowed. However, there are ways to accomplish investing with these individuals through all-cash transactions or by forming LLC's or Limited Partnerships.
It is easy to make your present IRA or 401K self-directed so you can invest in real estate. Your 401K usually must be from a previous employer, but check with your current plan administrator. You simply roll it over to a custodian or administrator that allows you to make investments outside of the stock market. Investigate any tax consequences for your particular situation. For those with high incomes, you will be allowed to rollover your Traditional IRA into a Roth IRA, despite your high income, in 2010 and pay the tax penalty over two years. Your profits will then accumulate tax-free.
There are many custodian and administrator companies to help you and answer your questions. Some of them are: Pensco Trust-- www.pensco.com, American Pension Services-- www.aps-utah.com, Equity Trust-- www.trustetc.com, Fiserv--www.fiserviss.com, Trust Administration www.Services--www.trustlynk.com, and www.Guidant--www.guidantfinancial.com.
When you are ready to purchase your property, you will need a non-recourse loan. I can help you with getting a non-recourse loan. With a non-recourse loan, an individual doesn't guarantee the loan. So if the borrower defaults on the loan, the only recourse the lender has is to take back the property.
Obviously your retirement account is not an individual who can sign for a loan. Non-recourse loans are very commonly used to purchase commercial real estate, where cash flow determines whether or not the loan is approved. The same criteria are used for a property purchased with an IRA.
Cash flow determines whether or not the IRA non-recourse loan is approved. This actually helps you as an IRA investor, because you don't want to pay a negative cash flow out of your retirement account every month. The terms are designed to help you accumulate wealth in your retirement account.
Typically 30% is required down. Then a vacancy factor of 5%, management costs, taxes, and insurance are taken out of the monthly rental income. After these factors are taken out, your remaining monthly rental income should be at least the same as your mortgage payment.
I have invested myself with my self-directed IRA and know that it is a proven formula for jump starting your retirement nest egg. Many others are doing the same thing. Make a penchant for real estate into a pension!
Have you had any experience with check-book LLCs formed thru a SDIRA.
I have been told conflicting stories as to weather this structure is legal or not.
What has your experience been.
The biggest problem that I see w/ this vehicle is it seems there is a lack of case law which would define what is and isn't allowed.
I have people offer Roth IRA LLCs and Traditional IRA LLC's. The idea is to organize an LLC and then purchase it through your Roth IRA account which you had set up with a reputable Roth IRA trustee. The next point is that you have checkwriting privileges directly from the LLC. The LLC has to have special language in its articles of organization.
As far as I know your Roth IRA cannot purchase and sell property directly from yourself, direct relatives, etc. I am not sure exactly how do you get the checkwriting privilege. A Roth IRA LLC accomplishes 2 things: 1. it reduces your transaction costs since you can write and accept checks without an intermediary like a Roth IRA trustee; 2. limits your legal exposure by virtue of the LLC. You can set up a land trust for each property separately to reduce visibility over your assets.
I spoke to a couple of attorneys about these structure. Both had not heard of this. Additionally, I thought that one has to be careful how much directly one is involved in the transaction since then the whole transaction may be disqualified from Roth IRA treatment. I agree with you - just like LP have a longer case law history than LLCs, so do IRA LLC's have less case law behind them than anything else.