Let’s cut right to the chase. You CAN use your retirement accounts to invest in real estate (and other real assets) .... and you probably should!
What are alternative investments, and why use them in your retirement portfolio? Real estate, gold, and private equity placements are common alternative investment choices. In fact, according to a July, 2013 report by the S.E.C., the growth in alternative investments (including real estate) is outpacing traditional stock market investments. Since most retirement investors are home owners, they’re comfortable with the mechanics of real estate transactions. You may find this true of yourself. Your knowledge and comfort level with the underlying asset are important considerations when it comes to directing your own retirement.
The two most popular options for retirement plan real estate investing are the Solo 401(k) and the Self-Directed IRA. If you’re not intimately familiar with these accounts or how take advantage of them, you’re not alone. They are often not promoted by brokerage firms, financial institutions, or investment advisors, who would rather sell you stocks or mutual funds for a fee. Your broker does not get a commission when you invest in an apartment building, a resort, or a new townhome project. But does that mean you shouldn’t consider it?
The Solo 401(k)
A 401(k) is an employer-sponsored plan that is essentially a legal tax shelter. A Solo 401(k) is one designed specifically for self-employed individuals who have no full time employees other than themselves, partners, or a spouse. You essentially become your own plan administrator (i.e.: think instead of “Vanguard’ it’s the “Smith Family 401k”), and the individuals in the plan (Bob Smith, Mary Smith) are account holders in the plan.
Working for another company or having W-2 income doesn’t preclude you from opening a Solo 401(k). For example if you or your spouse have a side business which doesn’t have any employees, and you report income from that business on your tax returns, you are still eligible to open and fund a Solo 401(k)
The Solo 401(k) offers the most flexibility permitted by law. You may direct your investments with virtually no restrictions on investment choices. You also have complete “checkbook control”, meaning you can write checks from your accounts for any type of investment you see fit, so long as its permitted by the IRS. Brokerage accounts can also be easily attached, offering the flexibility to invest in traditional securities like stocks and bonds, as well as “non-traditional” investments like real estate and just about anything else.
The plan also allows for high contributions. A Solo 401(k) participant can contribute to the plan as an employee and as employer, totaling up to $52,000 per person in 2014.
There is no annual contribution requirement, so skipping a year is allowed. Accounting maintenance and administration is slightly more complex than for an IRA, but minimized if the plans assets are under $250,000, as no year-end report filing is required.
To learn more about Solo 401(k)’s or to speak with a quality provider, check out our Providers Page.
The Self-Directed IRA
Simply stated, a Self-Directed IRA is a retirement savings account that permits the owner the broadest possible investment choices, including those outside the public markets. This includes the same diverse real asset options as the Solo 401(k).
If you don’t qualify for a Solo 401(k), the Self Directed IRA is the best vehicle to self-direct your retirement assets. Just like there exist well known “traditional” IRA Custodians (Fidelity, Vanguard, JP Morgan, etc.) there are a handful of companies that specialize in administering Self-Directed IRA’s. Rather than offering you a limited menu of stocks, bonds and mutual funds that they want you to consider, you tell them where you want to invest your money.
The key to the Self Directed IRA (and this applies to the Solo 401k’s as well) is the eligibility of funds to be transferred into the account. If you are currently working for a large company that offers a 401k savings plan, odds are the custodian will not allow you to transfer funds from your current employer’s plan. In most cases, only funds that are in a rollover IRA or that were accumulated at a PRIOR job or retirement account are eligible.
Many of us leave a job and don’t give much thought to what happens to our retirement savings plan from our former employer. We just roll it over to the new employer’s plan, keep it with the old company, or start a new rollover IRA with one of the big brand name custodians. However, if you have a retirement account that is no longer in “401k Jail” by your employer, you are sitting on gold, as that account is now eligible to be rolled over to a Self Directed IRA, from which you can call the shots rather than the Custodian.
What Kind Of Real Estate Can Be Purchased With Retirement Funds?
Almost any type of property can be part of a retirement plan: Single family homes, Multi-family complexes, Retail, Office, Industrial, Warehouse, Net-leased commercial, Land, Beach houses, Vacation rentals, Town homes, and Condominiums. By enabling you to direct your own fund’s Solo 401(k)’s and Self-Directed IRA’s allow you to invest in people and projects you know and understand. In the investment world, understanding where your capital is being deployed is a fundamental driver of success.
Where Can I Learn More?
The information provided above touches on the basics of these retirement plans. To learn more about Solo 401(k)’s and Self Directed IRA’s or to speak with a quality provider, check out our Providers Page.