IRA/Retirement Fund Financing
One fact becoming more and more evident is “Baby Boomers” are reaching retirement age in ever increasing numbers. A large percentage of these soon to be retirees have put money into retirement vehicles for 25 years or more. Many work for the same company or the military for most of their adult life and have retirement plans as well as there own retirement vehicles. It is important to know how these retirement vehicles can be tapped for real estate investment. A large part of this group will put off withdrawing funds from retirement accounts for as long as they can, enabling their investments to grow tax free.
The most common accounts are company sponsored 401Ks, Traditional IRAs and Roth IRAs. Most retirees think that they are limited to the traditional investment vehicles of stocks, bonds and mutual funds, but in fact real estate may prove to be their most advantageous way to grow additional wealth, Tax Free. Real Estate has proven a better investment than most others in many parts of the United States. It is just a matter of understanding the rules and then implementing an appropriate plan. There are a number of things that are specifically excluded from IRA investment, but real estate is not one of them. Before we go any further, we think we understand the rules but each investment is unique and your ability to use retirement should be discussed with your tax advisor.
IRAs, both Roth and Traditional - By far the least understood is the ability to use IRA funds for real estate investment. We have done extensive research and determined that it is merely a matter of understanding the rules, being careful to stay within them, and most of all finding an IRA administrator willing to work with the investor to facilitate the investments. Since the investment will be structured within the IRA and the IRA will hold title to the property. All such investments will grow tax free. In certain
locations this growth could be as much as 25% or more.
401Ks - It is difficult to invest 401K money directly into real estate, because
it is difficult if not impossible to find an administrator willing to facilitate
the investment. It is possible, however, to borrow investment funds from a
401K and these funds could be used for a down payment, etc. The biggest
drawback is that the profit from the real estate investment will not grow “tax
free”. The easiest way to invest 401K retirement funds in real estate is to roll over the funds into an IRA and then follow the rules.
Employer Sponsored Retirement Plans : Pension, Profit Sharing, Stock Bonus Plans, 401K and Keogh - Distributions generally are permitted only in the case of separation from service, disability, attainment of age 59 ½, death or termination of the plan. Distributions generally can be rolled over to an IRA.
From a real estate investment standpoint, IRAs are probably the best vehicles, as long as an appropriate fund administrator can be found. Strongly consider a trustee to trustee rollover to avoid unnecessary taxes and penalties.
Traditional And Roth IRA Assets Grow Tax Free BUT Be Careful Of The Pitfalls
Prohibited IRA Transactions
Borrowing money from an IRA
Borrowing money from an IRASelling Property to an IRA
Selling Property to an IRAReceiving unreasonable compensation for managing an IRA
Receiving unreasonable compensation for managing an IRAPledging and IRA as security for a loan
Pledging and IRA as security for a loanBuying property for future or personal use with IRA funds
Buying property for future or personal use with IRA fundsThe Key To Using Retirement Funds For Real Estate Investment Is Administering The Funds Correctly And Not Mixing Fund Money And Personal Money.
Section 408 of the IRS Code spells out what you can’t do. IRS Code Section 4975 talks to Prohibited Transactions.
The Problems Up Until Now With IRA Real Estate Investing:
IRA Custodians Limit Investment to conventional securities.
IRA Custodians Limit Investment to conventional securities.Administrators limit investment to Products sold by the custodian.
Administrators limit investment to Products sold by the custodian.Administrators Limit Risk by limiting choices.
Administrators Limit Risk by limiting choices.What You Can Do With Retirement Plan And IRA Money
Your Plan or IRA can purchase, sell or exchange any investment property.
Your Plan or IRA can purchase, sell or exchange any investment property.You may use Plan or IRA funds to construct improvements on property owned in your plan or IRA.
You may use Plan or IRA funds to construct improvements on property owned in your plan or IRA.You and/or relatives and others may own undivided interests along with your plan or IRA. The purchase of the property in this circumstance must be simultaneous to avoid a prohibited transaction.
You and/or relatives and others may own undivided interests along with your plan or IRA. The purchase of the property in this circumstance must be simultaneous to avoid a prohibited transaction.You may lease or rent the property to anyone who is not a disqualified person.
You may lease or rent the property to anyone who is not a disqualified person.You may receive property from your Plan or IRA as a distribution.
You may receive property from your Plan or IRA as a distribution.What You Can’t Do
The sale or exchange of property may not be to you or any disqualified person.
The sale or exchange of property may not be to you or any disqualified person.You, or any disqualified person, may not live in, lease or rent the property for any time period.
You, or any disqualified person, may not live in, lease or rent the property for any time period.Who Are Disqualified Persons?
A fiduciary of the plan
A fiduciary of the planA person providing services to the plan
A person providing services to the planAn employer whose employees are covered by the plan
An employer whose employees are covered by the planAn employee organization whose members are covered by the plan
An employee organization whose members are covered by the planA member of the family
A member of the familySpouse, lineal descendant/ascendant
Spouse, lineal descendant/ascendantBUT, Brothers or Sisters are NOT disqualified persons.
Leverage
Your Plan or IRA may finance the purchase of any property.
Your Plan or IRA may finance the purchase of any property.The debt is secured by the subject property financed in your Plan.
The debt is secured by the subject property financed in your Plan.To facilitate your use of IRA or other retirement funds, you might consider establishing an LLC (Limited Liability Company)
To facilitate your use of IRA or other retirement funds, you might consider establishing an LLC (Limited Liability Company)Why Establish an LLC ?
Liability Protection
Liability ProtectionEspecially good when Multiple Parties are Involved
Especially good when Multiple Parties are InvolvedConvenient
ConvenientPossibly the best way to interest Investors
Possibly the best way to interest InvestorsWay to sell shares to IRAs and other retirement funds in addition to investors
Way to sell shares to IRAs and other retirement funds in addition to investorsQuick Way to put “big numbers” together
Quick Way to put “big numbers” togetherShares in LLC capable of being valued and therefore distributed
Shares in LLC capable of being valued and therefore distributedThe manager which could be the investor could have checkbook control over the LLC assets
The manager which could be the investor could have checkbook control over the LLC assetsStrict Rules Need To Be Followed
LLC liability must be clear and distinct from the Fund Account
LLC liability must be clear and distinct from the Fund AccountThere can be no self dealing or dealing with disqualified persons
There can be no self dealing or dealing with disqualified personsManagement
You may manage the assets in your Plan or account, and you may be paid a reasonable fee from your account for managing those assets.
You may manage the assets in your Plan or account, and you may be paid a reasonable fee from your account for managing those assets.You could also manage the LLC if you chose to establish one.
You could also manage the LLC if you chose to establish one.Administration, record keeping and expenses related to maintenance of your Plan or account property may be paid by funds in your account.
Administration, record keeping and expenses related to maintenance of your Plan or account property may be paid by funds in your account.WHAT CAN BE DONE?
Finding The Right Real Estate Markets Could Easily Deliver A Real Estate Investment That Thru Leverage Compounds At 25% Or More.
Investment Compounded at 25% Tax Free If Invested Within an IRA
YearInvestment ValuesNet IncreaseYear End Value
Investment ValuesNet IncreaseYear End Value1$100,000.00 $25,000.00 $125,000.00
$100,000.00 $25,000.00 $125,000.00 2$125,000.00 $31,250.00 $156,250.00
$125,000.00 $31,250.00 $156,250.00 3$156,250.00 $39,062.50 $195,312.50
$156,250.00 $39,062.50 $195,312.50 4$195,312.50 $48,828.13 $244,140.63
$195,312.50 $48,828.13 $244,140.63 5$244,140.63 $61,035.16 $305,175.78
$244,140.63 $61,035.16 $305,175.78 6$305,175.78 $76,293.95 $381,469.73
$305,175.78 $76,293.95 $381,469.73 LEVERAGE THE LLC CREATES IS VERY POWERFUL
20 Investors Times $50,000 = $1,000,000, And Leveraged
That Could Purchase $20 Million In Real Estate
