“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
— Robert Kiyosaki
I’ve spoken to over 2,000 individual investors, and this question comes up a lot:
Can I use retirement funds to invest in real estate or alternative asset deals?
And the answer is yes!
A lot of people think they don’t have any cash to invest.
But they don’t realize they have all this cash in a retirement account.
Investing using your retirement account has a lot of benefits.
According to this paper studying personal retirement accounts, it can increase private savings and retirement wealth for lower-income workers.
There is also evidence that investing this way can affect your saving and consumption patterns.1
If you figure out how you can tap it, there’s a way to invest in many different asset types.
A lot of people think they need to take money out of their retirement account to invest.
Don’t do that!
If you can, leave it in the retirement account to see how it grows on a tax-deferred basis.
I’ll explain what I mean by that and more in this blog.
Let’s jump into it!
1. Understanding Self-Directed IRAs
We’re going to start off with the basics.
An IRA is an investment retirement account.
It can also be called a 401K or 503B.
You can use an employer-based plan that you work for at a job.
You put money aside out of your paycheck and they can either match or not.
There’s also something called a self-directed IRA (SDIRA), which is a self-directed investment retirement account.
Many people don’t realize that when we work at a job, we have access to the money in that retirement account.
You just have to ask HR if you can roll over the funds to a self-directed account.
You can do this while you’re still working for them or after you leave.
There are two types of self-directed IRAs.
The most common type of SDIRA is not really self-directed at all.
You can only invest in Wall Street assets like stocks or bonds or other types of financial assets.
If you’re with a big group like Morgan Stanley or Vanguard, you can typically only do traditional Wall Street type stuff.
The type I like is called Checkbook Control.
This type allows you to put money wherever you want it.
You’re the one who administers everything: you write the check and send the wire.
There are other self-directed ones that allow you to invest in real estate and other assets.
However, there’s an approval process.
The process isn’t difficult, but it can take up to three weeks.
You should be aware of that if you have an SDIRA.
You should also note that if you use leverage to buy a deal, you can get taxed at your normal income rates.
If I put in $100,000 and the deal requires 20% down, that means 80% would be leveraged to buy the property.
Let’s say the project value doubles and we sell it.
I’ve then made $100,000, with 80% of that amount gained using leverage.
If that $80,000 gain in my passive syndication is in a regular retirement account, like a self-directed IRA, I can get taxed on that at my normal income rate.
They could charge me up to $40,000 (depending on my tax rate) for using a retirement account.
It’s a sneaky kind of tax called the unrelated business income tax (UBIT).
There are some ways to get around this.
One is by using what’s called a Solo 401k.
If you have a business entity or an LLC, you can qualify for that.
If not, there’s another option called a QRP.
This is a little more expensive, but it does limit your exposure to the UBIT.
2. Setting Up An SDIRA
How do you set up an SDIRA?
The biggest obstacle is time.
The process can take up to three weeks.
Try not to start this process during a deal.
You can if you have time, but many deals fill quickly, so you should be aware of your own timeline.
Taking care of this process ahead of a deal is a much safer bet.
According to the Journal of Policy Analysis and Management, this type of planning can also enhance strategic acting, thinking, and learning that can also benefit your investments.2
If you reach out to our team, we can even help you set up this process!
3. Making Your First Investment
The last thing I want to talk about is making your first investment.
There are two types of self-directed IRAs.
There’s one that allows for real estate investment.
For a lot of them, there’s an approval process.
The request has to go from one desk to another so it takes a little more time.
When it’s checkbook control, I’m the one who determines when that money is sent.
I send the funds, either through a check or a wire, and the transfer can happen on the same day.
It’s so much easier to have checkbook control.
The other method does work, but I prefer having more control.
You can’t do self-dealing with your retirement accounts.
If you’re self-directing, you can’t buy a rental house and have a family member live there.
You also can’t do something like flip houses.
Retirement accounts don’t really work for that.
They work much better for passive investing in syndications and similar deals.
Now I want to share my favorite groups to work with.
The first is UDirect IRA with Karen Hall, who is a friend of mine.
The second is called Rocket Dollar.
And finally, QRP, which can help you avoid UBIT tax.
Now I want to hear from you!
How are you going to use your retirement account for investing?
Let us know in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
