This is part two of a two part series on how you can invest in Real Estate using your retirement funds that are in an IRA or Qualified Retirement Plan. The following is for educational purposes and you should always consult with your legal and accounting advisers to review your specific situation.
In the last article, I discussed how you can use a Self Directed IRA (SDIRA) to invest in Real Estate. Also there is a downside to using a SDIRA due to taxes that it will pay related to the earnings from leverage used to purchase the property. These taxes are related to the UBIT tax laws that govern IRA’s.
The good news is that you can avoid the UBIT taxes by using a Qualified Retirement Plan (QRP) to invest in Real Estate. A QRP is a retirement savings trust that conforms with Section 401 of the U.S. Tax Code. This section of the tax code is different than the tax code that governs an IRA and has significant advantages over an IRA. The 401(k) plans that are set-up through your employers use these same laws, but provide little flexibility in investment choices and are controlled by your employer.
The QRP that I am speaking about is one that you set up yourself that allows you to have significant choice over what you invest in, much like the SDIRA. There are similar restrictions, like the SDIRA, in what you can invest in, but it is not limited to a handful of mutual funds like your employers’ 401(k).
To qualify for this type of QRP, you must have a business that you own and operate. So a SIDE GIG or FULL TIME BUSINESS would allow you to set up a QRP. You then can fund it through annual contributions or rollovers from IRA’s or past employer’s 401(k) plans.
So why would I want to set one of these QRP’s up since it requires that I have my own business? Because there are a significant number of benefits that an IRA does not have due to the different tax laws that apply to the QRP. The following are the most important differences vs. an IRA that you should be aware of:
- Enhanced Asset Protection. These plans contain “anti-alienation” provisions under ERISA (Employee Retirement Income Security ACT). These provisions protect your plan investments from creditors, bankruptcy and the IRS.
- Debt Financing on Real Estate without adverse tax consequence’s. These plans do not have the UBIT tax requirements of the IRA and therefore do not have to pay taxes on the profits related to the debt financing. This difference in tax law could save you ten’s of thousands of dollars on one transaction.
- Enhanced Contribution Limits. 2019 limits for 401(k) and profit sharing plans is $56,000.
- Ability to be your own Trustee and directly control your plan. This allows you to write checks out of your account without any oversight and provides speed and flexibility that you may need. It also eliminates the trustee fees for each transaction and maintenance of your account.
- Ability to Borrow from your Plan. You can borrow up to $50,000 or 1/2 of the vested amount in your plan and repay it over time. This can come in handy when you need some quick liquidity.
As you can see, these differences vs. an IRA are significant and you should carefully consider using a QRP if you want these advantages.
I started investing in real estate syndications using an SDIRA before I became aware of the UBIT taxes that it would have to pay when the property is sold. The good news is that I have set up my own QRP and can transfer those investments into it before they are sold which will save me thousands of dollars in taxes.
I hope that you have found this information enlightening and can take advantage of it by unlocking the full potential for investing with your retirement funds.
Here’s to your Wealth and Happiness!
Dan Engdahl, Co-Founder Multifamily Connections, LLC