Invest in real estate with money you have already saved for retirement

So you’ve done your research and you are sold on the idea of investing as a limited partner in real estate syndications such as apartments, mobile home parks, or self-storage facilities.

“But,” you lament, “that means I need to have at least $25,000 just lying around!”

Once you have decided to start investing in real estate,  it may take some time to save 25 to 50 grand. But you may already have money to invest in real estate and not even know it: money that is languishing in an old IRA or another retirement account. Many of you have access to retirement funds to invest in real estate. Money that is currently fluctuating with the whims of the stock market can be transferred to a self-directed qualified retirement plan, allowing you to take control of your savings and create wealth through real estate.

If you have an IRA or any money in your 401k that was rolled over from a previous employer, you can transfer these funds to either a self-directed IRA or 401(k). What this allows you to do is invest this money in any variety of investments, including but not limited to the stock market. Here are a few options for investing in a self-directed plan:

  • Syndications
  • Passive real estate (worldwide): apartments, single-family homes, commercial property, land
  • U.S. gold and silver bullion coins or bars
  • Business startups
  • Tax lien certificates
  • Notes
  • Securities
  • CDs
  • Stocks, bonds, mutual funds
  • Commodities and futures

When I began investing as a limited partner in syndications, I realized that I had access to some rollover funds from my company 401(k), opened a self-directed 401(k) account, and have since stopped contributing to my company plan except for profit sharing. This allowed me to jump-start my real estate portfolio with three deals, two multifamily, and a self-storage facility.

The ideal retirement plan is a self-directed (sometimes called solo) 401(k) because you have true checkbook control of your money and invest as you see fit. With a self-directed IRA, you are able to invest in real estate and other transactions as listed above, but you have a third-party custodian that needs to approve your investments and can cause significant delays.  Also, self-directed IRAs are subject to UBIT (unrelated business tax income), a sneaky tax that gets triggered by investments that have debt involved (as most real estate does). There are several companies that provide services to help get you set up with a self-directed plan. These plans were traditionally for the small business owner. However, you can still qualify for one of these plans even if you do not have a small business. If you have a side gig, some part-time income, or even your real estate investment business, then you can have a self-directed plan.

The best part of being in control of your money is that you can take it out of Wall Street and from the fund managers that have been making decisions about your money that may be profitable for them but not necessarily in your best interests.

When distributions occur for investments that are in the retirement plan, all go back into the retirement bank account, including the proceeds from a sale. Imagine a large brick wall between you, the individual, and the LLC/retirement plan. And as with all retirement plans, the money grows tax-free, allowing you to reinvest the full amount of the dividends from your investments.

Other benefits of a self-directed 401(k) are the maximum contributions of $56,000 per year, the ability to borrow 50 percent up to $50,000 from your account, protection from creditors in lawsuits and bankruptcy, and the ability to purchase life insurance inside the plan.

There is also an option to convert some or all of your plan to a Roth, which allows you to pay taxes upfront on the contribution but the money grows tax-free and is not taxed at the time of withdrawal.

Why haven’t I heard of these plans?

Well, the retirement plan industry is a monster with over 25 trillion dollars in assets as of 2019. The vast majority of this money is held in paper assets on Wall Street, and the fees charged by these institutions are very profitable for them. They would rather you keep your money with one of them than take control and become your own trustee. This also means that you can take your money out of stocks, bond, and mutual funds and invest in other assets as listed earlier.

This is a brief overview to introduce the topic of qualified retirement plans.  To find out if your specific situation would benefit from one of these plans and to learn more, please contact one of the companies that specialize in self-directed retirement plans.

Vanessa Peters is a family physician and founder, VMD Investing.

Image credit: Shutterstock.com

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