Wait, You Mean I can Invest in Real Estate with My Retirement Funds with coffee cup

How To Invest For Retirement

Hey, what’s that I see there behind you? Is that an old 401k in the corner gathering dust?

Admit it. We all have old retirement accounts that aren’t performing at optimal levels but are gathering dust like those forgotten tchotchkes in our closets. The few times you face paltry growth, it’s easier to turn a blind eye, close your browser tab, or toss that statement rather than do something about it.

Believe me, I speak from experience. As a serial job hopper the first several years out of college, my retirement funds were like a barnyard of unruly animals from Old MacDonald’s Farm – here a 401k, there an IRA, everywhere a pension and 403b.

It was a mess.

One day, I finally said, enough is enough. I don’t want to be on the verge of retirement someday and still have to deal with a pocket of money here and a little bit there. I was also well aware that when you invest money into a standard 401k, you will be required to pay income tax when you eventually withdraw your money.

So, I did what it took to roll everything over and consolidate. I’ll tell you this, never had I met with so many notaries or discussed my retirement account in such a short amount of time. #hugyournotary

When all was said and done, I rolled everything into a few core accounts. Now that I could see everything all in one place, I could really see the lackluster performance. Over the past few years, my average returns in those accounts have been around 5%. Which, admittedly, is better than a savings account or CD, but it’s certainly not going to get me to that beachfront-villa-on-a-private-island sort of life, if you know what I mean.

Using Retirement Funds for Real Estate Investments

Then, the skies opened up, and I realized I could use my retirement accounts to make real estate investments. Say what?? It’s true. I’ll say it again.

You CAN use your retirement funds to invest in real estate.

Wait, you’re thinking, aren’t there a bazillion rules to follow with retirement accounts? I thought you couldn’t touch them with a ten-foot pole, or else you risk penalties, fees, and the infamous wrath of the income tax guy, right?

And that, right there, is why I think so many people have a few old retirement accounts sitting around gathering dust. From everything we’ve been taught, there are very strict rules about retirement funds, so it’s probably best to leave them alone. Plus, You’ve probably thought, “It’ll be decades before I can touch that money, so…I’ll just leave it for now.”

Should You Purchase Real Estate or Rely on a 401k? Two Drastically Different Retirement Outcomes

Let’s see exactly what “leaving it there for now” gets you in your retirement account in 30 years.

Hypothetical #1: Keep My Money Where It Is

Let’s do some quick math. Let’s say I have $100,000 in my retirement account now. And let’s say that I see about 7% returns over the next few decades annually. I’m able to add $10,000 a year with compounding growth. In 30 years, when I’m nearing retirement age, I’ll have…drum roll please…about $1.8 million in my retirement account.

Not bad, right? See, you’re thinking, I’ll be fiiiiine.

But wait! You knew there would be more, right? Now let’s add inflation into the mix. With inflation sitting at an average of 3.22% per year, that means that prices will double every 22 years.

So when I retire, that $1.8 million will be worth less than $900,000 in today’s money. Now, ask me how much confidence I have in living out my retirement years on $900,000. Eesh. #scarystuff

You also need to consider tax benefits. For example, when you buy a property with a 401k, the income generated from that property won’t be taxed but placed directly into the 401k plan. So, if you invest money into a standard 401k, you’ll need to pay tax when you eventually withdraw your money to fulfill those retirement plans you have.

Enter: The Self-Directed IRA

This is why I was so excited to learn that I could make a real estate investment with my retirement account. With a self-directed individual retirement account, I have way more control over the types of investments I can make. I’m just not limited to stocks, bonds, and mutual funds, though I could certainly keep investing in those if I wanted to.

Let’s take a quick trip through the way IRAs are set up: you can invest in stocks, bonds, or mutual funds, OR it is also possible to invest in real estate with an IRA. But it has to be a self-directed IRA.

With a self-directed IRA, you are free to invest however you like – #woohooo. You might find that if your individual retirement account is managed by a third party, they may be reluctant to let you invest in real estate. But there is absolutely no legal reason why you can’t.

Using Self-Directed IRAs to Make a Real Estate Investment

The rules around buying real estate with the personal funds in your IRA can seem kind of complicated – in broad terms, the government wants you to have distance from any real estate investing. So, if you purchase real estate through your IRA, you cannot live in or actively manage the property.

In technical terms, the title to any real estate purchased through self-directed IRAs is held by a custodian to ensure your retirement assets are protected.

Now, before you get too excited, there are limits. For example, you can’t use a self-directed IRA to invest in a vacation home for yourself.

Yes, I’m sure. I double checked that one.

Investing in Real Estate Syndications as a Way to Fulfill Retirement Plans

However, you can invest in commercial real estate syndications, which, like investing in mutual funds, would be entirely passive. You simply choose a syndication or real estate fund you want to invest in, and you direct the custodian of your self-directed IRA account to invest the funds on your behalf.

Any returns you make on the real estate investment go back into the self-directed IRA account. You need to remember that depreciation from real estate held by a retirement account is not permitted. All income made and lost from your Self-Directed 401(k) real estate investment should be allocated to the Solo 401(k) plan.

There are also tax advantages to progressing your retirement plans using a self-invested IRA. Usually, when real estate is sold, you usually have to pay capital gains tax, but investors will often purchase real estate via a self-directed IRA for the tax benefits it provides. Namely, the taxes are delayed, and your contributions can grow tax-deferred, AND Roth self-directed IRA contributions can be withdrawn tax-free upon retirement.

When you buy a property with your self-directed IRA, you will reap the rewards of the appreciation in value, AND all of the income you received, including rental income and capital gains, will be tax-deferred.

Income Tax and Your Roth IRA

A Roth IRA is taxed slightly differently than a traditional IRA because the income taxes owed based on contributions are taxed as in the year they are deposited. The benefit of a Roth IRA, though, is that the earnings on those contributions are not taxable when you withdraw them — after the age of 50, all or part of your Roth IRA contributions may be withdrawn income tax-free and without penalty.

Under certain circumstances, the IRS allows penalty-free and tax-free early withdrawals from Roth IRA those two criteria are:

  • The withdrawal must be used for a qualified purpose

  • The withdrawal can’t be made until five years after the account was originally opened

Are there Alternatives to Buying an Investment Property?

Many investors use their retirement accounts to invest in real estate as a passive (AKA limited) partner in a real estate syndication. You can invest in commercial property deals using your self-directed IRAs that you can’t with your regular Roth IRA — the beauty of that is you’re not only totally hands-off, but you’re mitigating any risk of real estate investing as the deals have been thoroughly vetted and are managed by a highly-qualified sponsor.

Hypothetical #2: Why Invest My Retirement Account In Real Estate Syndications?

Let’s apply the same hypothetical $100,000 to a self-directed IRA account, investing in real estate syndications. Let’s say the syndications I invest in each have a 5-year hold time with a 2x equity multiple. That is, over the course of 5 years, I would double my initial investment (roughly 20% annual returns).

That means in 5 years, my $100,000 would turn into $200,000. And by the time 30 years comes around, my self-directed IRA account would have about $6.4 million.

In case you’re struggling with the math, that’s $4.6 million more than in the previous example.

But wait! That’s not counting the $10,000 I would be adding to the account per year, like in the previous example.* If I were to add that in, that means every five years, I would have an additional $50,000 to invest. Once I factor that in, I’d have over $9.5 million.

Don’t trust my math? That’s okay, me neither. Below are the returns plotted out on a timeline of 30 years, assuming the investments I choose all have an equity multiple of 2x over five years or an average annual return of about 20%.

*Note: Being able to add $10,000 per year to your self-directed IRA account assumes that your employer’s 401k allows in-service rollovers. If this is not the case, you may only be able to contribute $6,500 a year, which would make the total amount at the 30-year mark around $7.4M. Still not too bad, if you ask me.

I don’t know about you, but I’d take $9.5 million over $1.8 million any day.

Add to that the impact of all those real estate investments over 30 years. All the thousands of families my money will help over that time, whose apartments I could help fix up, and whose communities I could help improve when I purchase tax-deductible real estate.

For me, the choice is easy. I choose real estate investing every time. And it hasn’t let me down yet.

Make Your Retirement Plan Now

The problem is that you can’t make that choice when you’re 65 and already at retirement age. You have to make that choice now. If you close this article and decide to do nothing about it, procrastinating for another five years, you’re potentially missing out on hundreds of thousands of after-tax dollars.

The only person who will take care of the OLDER YOU someday is the YOUNGER YOU today.

Why am I choosing to take charge of my retirement funds now?

Simple. For my children.

If I only had $1.8 million in my bank account on the day I retire, chances are, those funds would run out. Or, at least, every credit card swipe would make me nervous about those funds running out, which would strain my relationship with my children, I’m sure of it, and that’s not the legacy I want to leave.

So, for my future self, I’m fighting through the sea of paperwork, learning the lingo, and doing whatever it takes today so I can be sure I’m living life on my terms. Now, and always.

Come join me, and let’s dust off those old 401k’s together.

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