Do you enjoy the stock market? Do you like having most if not all of your retirement savings in the stock market? Would you like to invest in real estate, but all of your available money is tied up in retirement accounts? Let me explain how to use retirement accounts to invest in real estate. There are others, but the two retirement accounts we will cover here today are the self-directed IRA(SDIRA) and the solo 401(k). Almost anyone can rollover money in a retirement account (401k, IRA) into one of these retirement accounts(SDIRA, solo 401(k)), assuming they are eligible to open one of these accounts. Here is a chart from the IRS on eligible rollovers: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf. Rolling over simply means transferring from one retirement account to another. The key is are you eligible to open a SDIRA or solo 401(k)?
First, we’ll discuss the SDIRA. A SDIRA has the same eligibility requirements as any other IRA and there is a Roth option for the SDIRA. The most effective way from a tax perspective to buy real estate in a self-directed IRA is to buy a piece of real estate outright including paying for any rehab without a loan. Let me explain why. Normally, when buying real-estate a person puts a down payment of around 20% and gets a loan for the other 80%. While you can do this in a self-directed IRA, only the 20% that you used for the down-payment grows tax-free. The 80% of the investment that you get with a loan is subject to Unrelated Busines Income Tax(UBIT). For example, let’s say that we buy a single family residence for $200,000. We put $40,000 (20%) down from our self-directed IRA and we get a loan for $160,000 (80%). Let’s say that in a year after expenses you make $10,000. $2,000 (20%) will go to our self-directed IRA tax free, but the other $8,000 (80%) of our profits will get hit with the UBIT. Anyone want to take a guess what the current UBIT tax rate is?…37%…ouch! So, in this example, you would pay 37% taxes on $8000 of your profit which would be $2960. This tax of $2960 must be paid by your IRA. Unless you want to buy real estate without financing, make sure you understand all of the tax implications of using a self-directed IRA to purchase real estate.
Next, we’ll discuss the solo 401(k) which is also available with a roth option. Who’s eligible for a solo 401(k)? According to the IRs, “A business owner with no employees” qualifies for a solo 401(k) https://www.irs.gov/retirement-plans/one-participant-401k-plans. Some business owners with no employees include the sole proprietor, home-based business owner, independent contractor, consultant, or small business owner. You can only obtain non-recourse loans when buying real-estate with a solo 401(k) which is a good thing for you the borrower. A non-recourse loan means that if you default on the loan, the entity holding the loan can only go after the collateral. In this example if you default, the lender can only go after the property the loan is with. The beauty of the solo 401(k) is that IRS 514(c)(9) exempts the solo 401(k) from UBIT tax! Yes, you read that correctly. In the above example, instead of paying 37% on the $8000 profit using your self-directed IRA, if you bought the same piece of real estate using a solo 401(k), all of your profits would remain in the solo 401(k) and be tax free.
Absolutely, you can invest in real estate using your retirement money. Yes, you might be eligible to rollover money in your current retirement accounts into one of the above retirement vehicles assuming you are eligible. This is intended to be a brief overview and is for educational purposes only. There are many details and iterations which may or may not apply to your specific situation. Please consult a qualified accountant to see if one of these options might work well for you.

Vincent Cyran