“The question isn’t at what age I want to retire, it’s at what income.” – George Foreman
Retirement is one of those topics that everyone has thoughts on. Even your neighbor who doesn’t even have a retirement plan has their thoughts.
But have you ever wondered if you can use your retirement funds to invest in passive investments such as multi-family real estate syndication?
The short answer is yes, you can!
But there is a little more to it than that.
I have talked with over 1000 investors who are in multi-family syndication, and the question that comes up most often is:
How do I use my retirement account to invest?
Retirement can be a complicated and wrought topic. Lucky for you, I am here to break this process down and give you the insight you need to make the best use of your retirement.
To do this, there are a few things you need to know.
#1 Get the Right Account
Let’s get the cat out of the bag right away.
Not all retirement plans are created equal. Not every plan will allow you to invest your retirement savings in real estate.
Most retirement accounts do not allow investment into real estate syndication. These are the more standard IRA accounts. Think of the big names like Vanguard, Morgan Stanley, Fidelity, etc.
These accounts may look like they allow real estate investment. On a closer look, however, they only allow for investment in real estate through REITs and not though private placement, which is what multi-family syndication falls under.
But this doesn’t help if you want to get into a multi-family syndication deal.
Instead, another option for your retirement funds is starting a SDIRA – or a Self Directed-IRA.
These accounts allow you more control of your money and can allow you to invest in real estate.
You need to do your homework though. Not all of these are equal either. You must make sure that the SDIRA plan that you are looking at allows for real estate investments and allows for alternative assets.
On the flip side, there are also some disadvantages to a SDIRA you must consider.
The first is that the process is that it can be slow.
Even if you have control of your money, it can take as long as 3-4 weeks for you to get through all the paperwork and red tape to transfer the money. If you are looking at a deal, that waiting period could be the difference between getting into the deal or not.
The other disadvantage is UBIT.
UBIT stands for Unrelated Business Taxable Income. This is a sneaky tax that not many people are not aware of.
Basically, this is when a tax-exempt fund makes a profit by non-tax-exempt means, such as real estate. Meaning, the IRS can tax you based on how much debt the property took on.
Really quick example.
If you invest $100,000 into a deal and you doubled the money in five years, but 70% of the property was financed, then they can tax you on 70% of your gains.
So at $100,000 of profit, that could cost you between $20,000 and $30,000 worth of taxes taken out of your IRA.
And when you take the money out at retirement, you are taxed again!
While there are these downsides, if this is something that you think will work for you, you can quickly rollover your current IRA into a SDIRA in just a few days.
From there, you can invest to your heart’s desire.
But even still, if you are worried about paying the double tax, you may be able to avoid it by switching your retirement fund to another type of retirement account BEFORE the property is sold.
Curious? Let’s find out more!
#2 Consider a QRP
QRP stands for Qualified Retirement Plan.
This type of account is not subject to UBIT! This is among other amazing advantages over standard IRAs.
These accounts also allow for checkbook control. This allows you to transfer over your money faster, and not have to worry about the red tape.
There is also a layer of liability protection within QRP accounts.
And if you transfer your SDIRA into a QRP before the property you are invested in is sold, then you are not responsible for paying the UBIT.
There is a bit more to a QRP than that, but I have a section in the resource area of my website that can tell you you need to know about QRPs.
As of now, there is only one group that I know of that is doing these kinds of accounts, but it is still a great way to use your retirement funds without as many of the drawbacks.
#3 Some Disadvantages of Using Any Retirement Account
Now I am not trying to discourage you from using your retirement account to invest. You may have the money in retirement ready and waiting, and this could be the perfect opportunity to invest.
I only want you to be aware of the downsides.
One of the biggest disadvantages is that funds used to invest from retirement accounts don’t allow you to use the same tax advantages as a cash account. This is because retirement accounts are already considered tax-advantaged.
Mix that with the possibility of paying the UBIT, and you could be seriously digging into your investment gains.
Investing with a retirement account can also be less flexible.
Some sponsors don’t even want to take retirement funds because of the difficulty of working with them.
Again, if you have money in your retirement accounts, it’s great to be able to use it.
As always, just make sure to educate yourself and to do your due diligence. Figure out which way to invest your money works best for you.
The more you know, the easier the decision will be.
And when it comes to helping you learn even more about passive investing, I’m your guy!
If you are interested in learning more, we have a special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
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.