Archive for June, 2016

Utilizing your IRA to Buy and Sell Real Estate

Thursday, June 9th, 2016

real esteat ireaa

Self-directed IRAs are the less offered and lesser known of the IRA options. That’s simply because they’re seen as needing too much effort to utilize correctly. The truth is that self-directed IRAs aren’t as complicated as they’re made out to be. Especially if you have the right custodian who offers the services you need to successfully run your account.

Similar to other IRA accounts, owners can still invest in stocks, bonds, and mutual funds. They can also invest in things like small businesses, boat slips, storage units, parking lots, land, and homes.

Some investors may be understandably leery of investing in the housing market. But real estate can be a good long-term investment and generate higher returns than the stock market can. But the process of using a self-directed IRA to jump into investing in real estate requires preparation and caution.

The move towards a self-directed IRA can make sense in certain circumstances, but only when the investor fully understands both the positives and negatives and the requirements involved.

Interested investors should seek legal advice, as well as input from an accountant and real estate agent for a well-rounded picture. They should also be familiar with the rules for the type of IRA they’re using. Whether it is a Simple IRA, Roth or Traditional IRA, SEP or Solo 401(k), contribution limits still apply, and there are penalties for early withdrawals.

Here are five things to keep in mind when considering investing in real estate through a self-directed IRA.

Know that it takes time

Devise a timeline based on the account-opening process, transferring or rollover of assets, and finding the actual investment. It normally takes two to three weeks to open an account at a typical brokerage firm, and you’ll need to find a custodian, like Accuplan, who will hold a real estate IRA. Keep in mind that the down payment and all funds must come from your IRA.

When a real estate investment is contracted, the IRA account holder reviews and signs the purchase agreement and then the custodian must approve it and release of funds to the title company. All of this takes time, so it’s prudent to learn as much as you can before jumping into a decision.

You have to wait until retirement

By IRS guidelines, you cannot take advantage of IRA investments until you retire. You can’t use the fund to pay off your mortgage, or live in, or use the property you buy as an investment in the self-directed IRA, because you don’t own the property, your SDIRA does.

There are other restrictions

Your spouse, immediate families or companies you have a 50% interest in cannot be involved in investing in property. While it is possible for the property to be held as tenants in common, an IRA is an individual account—and you must avoid any conflicts of interest.

Self-dealing or enabling a transaction that is beneficial to you on the other end is strictly prohibited. You also cannot use the IRA as collateral for a loan; it should be treated like other retirement accounts because again, you yourself do not own the property, your IRA does.

It can be a lot of work

While late-night infomercials highlight the potential benefits, many investors don’t fully appreciate or understand the reporting and administrative requirements involved in a real estate IRA. For example, the investor should not be doing the work on the property. Especially so because they can’t get reimbursed, that’s considered self-dealing.

Make it a little easier

All expenses, maintenance, taxes, and insurance are paid from the IRA. If there are also association dues or golf memberships, those all must be withdrawn from the IRA. That’s a lot of work on you as the real estate IRA holder. It can take a lot of time for your custodian to get the proper paperwork, or send payments to get repairs done, or taxes paid, so consider opening an IRA LLC with checkbook control. With checkbook control, you don’t have to wait on anyone to approve funds. You will literally have a checkbook or debit card that’s linked to your IRA, so you’re able to immediately pay.

Start Rolling Over Your 401K to an IRA

Monday, June 6th, 2016


When it comes to a 401K, you can take it with you from job to job, and in fact, you should, and it should be in the form of a 401K rollover. But making the most of the money you’ve built up means performing the rollover correctly. Here’s the four-step process for how to rollover a 401K to an IRA. As with any big decision, it’s always good to know your options before you go all in, so let’s start there.

What are your choices?

If you’re leaving a job, you have three basic options — none of which allows you to continue contributing to the plan, but all of which ensure that the money you’ve already contributed remains yours:

  • Leave it alone. If your previous employer allows, you can leave the plan right where it is. However, it isn’t ideal for a couple of reasons: You’ll no longer have an HR team at your disposal to help you with plan questions, and you may be charged higher 401K fees as an ex-employee. So really, leaving your account behind is kind of like leaving money in a savings account at a small-town bank when you’re moving to another state — you can do it, but life will be easier if you don’t.
  • Cash it out. But be cautious with this option, because not only can cashing out sabotage your retirement — you’ll lose the power of compound interest, especially if you’re early in your career — but it comes with some brutal penalties and taxes levied by the IRS. You’ll pay a 10% early withdrawal fee, plus ordinary income taxes on the amount distributed. That means you might hand over up to 40% of that money right off the top. Bottom line: Bad idea, if you can avoid it.
  • Roll it over. This is the best choice for many people: You can roll your money into either your current employer’s retirement plan or into an IRA, and in most cases, the IRA is the destination of choice. There, you’ll have a wide variety of investment options and low fees, particularly compared with a 401K — even the fresh, shiny one at your new employer — which often has tightly curated investment options and administrative fees.

Should you open an IRA?

If you have an existing IRA, you can just roll your balance into that. If you don’t, you’ll need to make two decisions: where to open that account — which means selecting an online broker, and which type of IRA you want, a traditional IRA or a Roth.

The main difference between a traditional IRA and a Roth IRA is their tax treatment:

  • Traditional IRAs net you a tax deduction on contributions in the year they are made, but withdrawals in retirement are taxed.
  • Roth IRAs don’t include an immediate tax deduction, but withdrawals in retirement are tax-free.

The difference between these accounts always matters, but it matters a lot on a rollover:
Although you can choose to roll it over to either account, rolling to a Roth means you’ll pay taxes on the rolled amount because it will be treated like a Roth conversion. (The exception is if you’re rolling over a Roth 401K, a type of 401K that mimics the tax treatment of a Roth IRA. You cannot roll a Roth 401K into a traditional IRA, but you can roll it over into a Roth IRA tax-free)

Once it’s in the Roth IRA, the money — and any additional contributions you make, plus investment earnings — will be available for tax-free withdrawals once you hit age 59½. It’s a good deal and will get you around Roth IRA eligibility if your income is too high to otherwise contribute. But you shouldn’t do this if you need to use cash from the rollover to foot the tax bill.