Do you realize that you may use all or a portion of your retirement funds to invest in real estate? Retirement accounts are basically Trust accounts for your benefit when you retire. In the 1970s, the IRS approved real estate as an investment option you can purchase with your IRA or a 401 (K).
You may also obtain a non-recourse real estate loan that is granted to your self-directed IRA which will increase your purchasing power. Typically, the lender will loan up to 50% loan to value on a 3, 5 or 7 year adjustable rate mortgage. Today's rates are around 4.5%-5.5%. There are several lenders that offer this very unique product. See link below.
This is an incredible tool for investors and real estate has historically been a good investment. Most individuals currently hold stocks, bonds or mutual funds in their IRA accounts, which can be sold to purchase a real estate investment. You can defer the tax on the gain from the sale of the stocks as they are not removed from your IRA account. Please be sure to check with your account manager regarding any fee or charges related to the sale of your current IRA investments.
As with stocks, you can buy and sell real estate within the IRA account and defer your tax payment on the gain.
When you hold real estate in the account, annually you must provide the IRA or 401(K) Trust Manager with an appraisal of the property and the balance of the operating checking accounts assigned to the real estate. This is an IRS regulation.
There are fees associated with this type of investment: possible LLC renewal fee with the state, Trust Manager’s annual asset fees and possible management fees. I partnered personally within the LLC that owns the real estate with my IRA, this allowed me to self-manage the account and avoid the expense of the Trust Manager for the day to day operation management of my asset, i.e., bill payments and rental income deposits.
Further, you can start moving a percentage of the real estate asset over from your 401 (k) at age 60 and pay taxes on the percentage of transfer in smaller increments. In my case I own a rental house at Roche Harbor that is valued around $700,000. Rather than me having to sell the home to liquidate and allow myself to transfer over small increments of cash from my 401 (K), I can deed a percentage of the real estate to myself personally each year. This avenue allows me to keep the real estate investment but remove it from my 401 (K), should I want to do so. Further it lets me stagger the tax due in smaller increments in years where my other income is down.
Another option that I have been using is lending money to borrowers secured in first lien position with a note and deed of trust. The yields to my 401 (k) account have been no less than 5% and you can also charge loan fees up front. You would want these loans to be well collateralized, short term such as 1-3 year and a decent loan to value ratio such as below 70%. Unless of course, you know your borrower and collateral well. The monthly or annual payments and ending payoff is payable from the borrower directly to your IRA or 401(K). There will be a service charge you must pay to make these arrangements with your IRA or 401 (k) servicer.
You can also loan the funds to yourself personally from your 401 (k) to purchase real estate that is not held in your 401 (K). You are restricted to 50% of the balance of the 401 (K) but it is a way to access your retirement funds for investment purposes. You have to collateralize the loan with a note and deed of trust on the real property and pay your 401 (K) a market rate of interest so the IRS can note it is an arms-length transaction.
For more information use the website link shown below. At the bottom of the Real Trust Group’s webpage are links that I found very informative. I recommend working with Mark Hodges from Real Trust IRA Alternatives - 877-536-4100.
This article is for informational purposes only and should not be relied upon. It is recommended that you consult with your financial planner or CPA for additional information regarding your personal tax issues.
Merri Ann Simonson
Coldwell Banker SJI