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How to Start a Real Estate Business with Your Retirement Funds

“Buy land, they’re not making it anymore.” ~ Mark Twain

Being real estate investors, none of us could deny what Mark Twain said here. Whether you’re just starting with real estate investing or have a long track record, you always want certain things to work in your favor. For starters, a day with 28 hours and easy access to credit!

While the former isn’t possible, a little research and expert help could help you achieve the latter. How? Use your retirement funds to purchase real estate!

What? Is that even legal?

The IRS allows you to invest in real estate through qualified retirement plans. However, some custodians and plan providers may restrict the investment options you have access to.

A self-directed Solo 401k retirement plan is one of the most popular qualified retirement plans among full-time real estate investors, allowing them to add real estate to their retirement portfolio.

invest in real estate

Use your retirement funds to invest in real estate!

Understanding a Self-Directed Solo 401k Retirement Plan

Self-directed Solo 401k retirement plans target owner-only businesses and self-employed individuals.

The primary eligibility is to have either part-time or full-time self-employment.

In fact, business owners working with their spouse are eligible to open a Solo 401k account, with their spouses having similar contribution limits/options.

What You Should Know About Solo 401k Retirement Plans

  • Annual contributions: $60,000 for 2017 (inclusive of catch-up contributions of up to $6,000 for individuals over 50).
  • Roth contributions: Make Roth contributions of up to $24,000 in 2017, irrespective of your income threshold.
  • Dates to remember: Establish your Solo 401k plan before December 31 of the year for which contributions are to be made. You can make elective contributions up to December 31 whereas, profit-sharing contributions could be made up to the regular tax-filing deadline plus extension.
  • Participant loan: The IRS allows every eligible plan participant to borrow up to $50,000 or 50% of the account balance.
  • UBIT exemption: You receive UBIT exemption when purchasing real estate with non-recourse financing.
  • Diversification: With a self-directed Solo 401k, you can invest in real estate, mortgage notes, tax liens, tax deeds, precious metals, private equity, and the traditional stock and bond investments.

How to Use Your Retirement Funds for Real Estate Investing

  • Open a self-directed Solo 401k account: Start by opening a self-directed Solo 401k plan. Make sure that your Solo 401k provider allows real estate investing, along with other alternative investments. Look for checkbook control option, as it will make investing as easy as writing a check.
  • Fund your retirement account: Once the account is active, it’s time to fund it with qualified rollovers and regular contributions. According to the current regulations, you can rollover funds from any retirement accounts including 401k, 403b, 457, thrift saving plans, traditional IRA, SEP IRA, SIMPLE IRA, defined benefits plans, and Keogh plans. The only exception is a Roth IRA, so do not rollover funds from it.
  • Choose a property for your Solo 401k plan: After funding your plan, the next step is to choose an investment property. The property selection criteria will vary depending upon your investing strategy.
  • Use of non-recourse financing: If you’re short on funds, the IRS allows you to fund the purchase with a non-recourse loan.
  • Title the property correctly: The only difference between purchasing a property with your Solo 401k and personal money is that your Solo 401k account holds the title of the property. You will sign on its behalf as the trustee of the Solo 401k plan.
  • Residual income and expenses: Make sure that any income generated by the property flows back into your Solo 401k account. The same rule applies to the expenses incurred in the maintenance of the property

Solo 401k Real Estate Investing: Important Regulations You Need to Know

  • Never use personal funds: When it comes to real estate investing with your retirement money, never use your personal funds for either maintenance or repair expenses. Using your personal funds would be a prohibited transaction, attracting regulatory penalties. Similarly, when financing the purchase, use non-recourse financing only because using personal funds for purchase would set off prohibited transaction rules.
  • oopsProperty Management: As per the current regulations, the plan owner or any of the plan participants cannot provide property management services. You’ll need a third-party property management service.
  • Never use the property for personal gain: For properties held within a self-directed Solo 401k retirement plan, the plan owner or participants cannot benefit personally from the property, which means you cannot use it for commercial or residential purposes. In addition, none of the disqualified persons can either use or provide a service to the property.

With all of these benefits and investment flexibility, opening a self-directed Solo 401k will be one of the best financial decisions of your life.

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About the Author...

Dmitriy Fomichenko is the president and founder of Sense Financial Services, LLC, a leading provider of retirement accounts with "Checkbook" Control: the Solo 401k and the Checkbook IRA. Over the years he's instructed dozens of investment & financial planning seminars and mentored hundreds of investors.

To learn more about the Solo 401k plan, visit sensefinancial.com and read Dmitriy's full bio here: http://www.sensefinancial.com/dmitriy/

Comments

  1. Joseph says:

    Hello,
    This article on self directed solo 401k is great. Which investment companies have this retirement plan that I can sign up? Does this mean I need to hire a property management company to handle all landlord duties?

    Thank you.

    • Dmitriy Fomichenko says:

      Joseph, if you are looking for a truly self-directed Solo 401k plan then you don’t want to go to the investment company to set this up. Investment companies who offer Solo 401k plan would normally put clauses in the plan documents limiting your investment options only to those that they offer. You will need a provider who does not offer investments (my company is one of such providers).

      You don’t necessarily need to hire a property management company. You can perform basic administrative duties, but all physical labor must be outsourced to third party (who is not a disqualified). This article might be helpful:

      http://www.sensefinancial.com/property-owned-by-qualified-plan/

  2. I have a 401k with my job, should I call them and ask them about
    turning it into a solo 401k?
    Thank you

    • Dmitriy Fomichenko says:

      Hi Gina,

      First of all, you can only setup Solo 401k plan if you are eligible for it (are self-employed or own a business without full time employees other than the business owners and their spouses).

      If you are eligible and setup you Solo 401k plan you can fund it by rollover from any other retirement plan with the exception being Roth IRA (IRS does not allow Roth IRA to be rolled into 401k). If you have an employer sponsored retirement plan (401k, 403b, 457, etc.) you can typically move those funds if you are no longer working for the company (in other works it is previous employer 401k) or reach a retirement age.

      So assuming that you are eligible you should contact your 401k plan administrator and ask them if they will allow “in-service distribution” (rollover while you employed with them). If the answer is yet the the new Solo 401k plan needs to be established first in order to accept the rollover.

      Hope this helps and if you have any other questions please let me know.

  3. Owner Finance OKC says:

    This is a great article, informative & very helpful, thank you for sharing

  4. OK Cash Home Buyers says:

    Thank you for sharing this awesome article, very informative

    • Dmitriy Fomichenko says:

      I’m glad you enjoyed it! Let me know if you have any specific questions I can answer.

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