Most professionals have trouble accessing passive investment assets due to a shortage of capital, yet they have massive retirement funds locked up in accounts. Are you a healthcare provider or busy professional and would like to access your savings for investment? Do you wish to enjoy some of your retirement benefits before retiring? Worry no more because you can secure passive investments through real estate using your 401k.
Multifamily syndication deals are getting popular due to consistent profitability and safety. Stable return potential, diversification, and hedge on inflation are benefits of investing in real estate syndications. You probably do not want to be left behind, right? Most real estate syndication deals require a minimum investment of $50,000. Therefore, you can be an accredited or non-accredited investor but have a deficit for the investment.
It is generally impossible to directly invest in real estate using an employer’s 401K plan. I have hardly found an employer-sponsored savings plan that gives employees the chance to buy real estate property or participate in real estate crowdfunding. The only possible way of investing indirectly in real estate will be if the employer-sponsored 401K plan has a real estate investment fund, e.g., the Vanguard Real Estate Index Fund.
However, you can use your 401K and IRA (Individual Retirement Account) to unlock your retirement funds and cast the money into profit-generating investments outside the stock market. You can achieve this without incurring exorbitant withdrawal penalties. Below is the information you need to use your retirement accounts to invest in real estate syndications.
What is Self-Directed Individual Retirement Accounts (SDIRA)?
A self-directed IRA allows you to make investment decisions actively and exercise authority in selecting the type of investment you would like to purchase- the reason it’s called “self-directed.” A qualified trustee must, however, hold the IRA. The trustee maintains financial records, issues client statements, files required IRS reports, and discloses the IRAs’ laws. The rules may address penalties for early withdrawals, distributions, deductibility, and contribution limits. The custodian must be a body approved by the IRS (Internal Revenue Service).
An SDIRA provides a significant diversification opportunity outside the stock market, bonds, and mutual funds. With SDIRA, you can invest in:
-cryptocurrency
-real estate
-undeveloped or raw land
-tax lien certificates
-Gold, silver, and other precious metals
-Livestock
-Mineral rights, oil, and gas
-Water rights
On the other hand, you are restricted from purchasing collectibles such as artwork, coins, and antiques.
Many passive investors get started with real estate syndications using their retirement funds. First, you need to roll over your existing retirement funds, such as IRAs and 401k, from a former employer into a self-directed IRA account. Once you roll over your retirement fund in the self-directed IRA account, you are in charge of making investment decisions, and the self-directed IRA custodian or trustee will invest it on your behalf. Your role in investing in real estate syndication is to submit legal documents for the syndication (private placement memorandum, operating agreement, and subscription agreement) to your self-directed IRA custodian, and they will wire in the funds on your behalf. Any profits you make on the investment must go directly back into the self-directed IRA account, never into your personal accounts. The custodian or trustee maintains financial records, issues client statements, files required IRS reports, and discloses the IRAs’ laws. The rules may address penalties for early withdrawals, distributions, deductibility, and contribution limits. The custodian must be a body approved by the IRS (Internal Revenue Service).
Benefits of Self-Directed IRA
I. Diversification. You get to invest in different asset classes than traditional retirement accounts; you’re limited to the stock market.
II. Tax advantages. You can defer taxes in a self-directed traditional IRA or avoid capital gains taxes when investing with after-tax dollars in a self-directed Roth IRA. Upon retirement, Roth SDIRA contributions can be withdrawn tax-free.
III. Creditor protection. Just like other IRAs, SDIRAS protects assets from lenders in the case of bankruptcy, usually up to $1M, depending on your state. You have peace of mind that your investments are safe.
Disadvantages of SDIRA
I. Loss of some tax breaks. You lose depreciation claims and operating loss benefits.
II. Many restrictions. For example, you cannot invest in your deal or use the property to purchase or sell it to any of your relatives.
III. Due diligence is a must. You will have to conduct your due diligence on the investment since the trustee only plays a passive role.
IV. Unrelated Business Income Tax (UBIT). This is a tax imposed on the profits of a tax-free entity-owned business. It also applies to an IRA that uses debt financing to purchase an asset, e.g., real estate. The income realized from the debt, Unrelated Debt-Financed Income (UDFI), is subject to UBIT.
What is Self-Directed 401K?
Also called Solo 401K, like SDIRA, it allows you to freely invest in instruments outside the stock market. You can therefore invest directly in real estate or passively through syndications. It gives you control whenever you want to buy an investment using your retirement account. You only write a checkbook adhering to underlying rules.
Advantages of Self-Directed 401K
I. Self-Directed 401K is not subject to Unrelated Business Income Tax (UBIT). The IRS provides a particular exemption for solo 401K loans that can be significant tax gains.
II. Tax benefits. Solo 401Ks adhere to IRS laws and thus automatically qualify for consequent tax benefits.
III. Minimal plan constraints. Solo 401K plans give you the utmost authority regarding what to invest in, when to invest, and when to access your funds.
IV. Consolidated accounts. You can efficiently manage funds in all other existing retirement accounts by consolidating them. You can also bring together your retirement accounts and your spouse’s and oversee them under one plan.
Other ways to invest in Real Estate using your 401K
Besides using a self-directed 401K, you can use your account in the following ways:
I. 401K loans. You can request a loan using your 401K as the appraisal account. Most plans will give you a loan of up to 50% of your balance to finance your real estate investment. You must ensure the loan is repaid within a five-year timeline with a 1% typical interest above the prime lending rate. Interest payments should be channeled to the account and not your personal account. Late repayment of the loan will lead to a 10% penalty and income taxes owed to your tax bracket. This means it is treated as an early distribution.
II. 401K Roll-over to a Roth IRA. A Roth IRA allows for tax-free withdrawals from the account provided the necessary conditions are met. You can then use proceeds from the investment to invest in real estate syndication.
A direct rollover of $10000 into a Roth IRA enables you to avoid the 10% withdrawal fees and restrictions mounted on 401K distribution.
401K funds are pre-tax contributions, while Roth IRA funds are post-tax contributions implying you will have to pay income tax on the transferred funds.
Conclusion
Having a retirement fund provides you with different options for investing in real estate. You can access your retirement funds or even apply for a covered loan to purchase an asset.
Investing your money into a real estate syndication is a safe investment that guarantees returns on your capital. So, why wait? Contact us for all information you need on profitable passive investing and getting started.
