Converting 401K funds into RE investment...

[shell1ton 0]

This might fit better in the financing section, please move it if you feel it appropriate to do so.

 

I believe I heard that you could use money from a 401K to fund a real estate transaction, maybe they said IRA.

Either way, is it possible to do this w/o incurring the early withdrawal penalties and capitol gains?

 

If so, what is the next step after you turn it over for a profit, reinvest like a 1031?

[Dave T 0]

shell1ton.

 

If you're in-between jobs, layed-off or terminated, or moving to a new job with no retirement plan you may want to rollover your existing 401k account funds into a traditional IRA (individual retirement account) to avoid taxes and early withdrawal penalties associated with direct cash disbursements. Avoiding this unnecessary additional income tax and keeping your money invested also allows the maximum tax-deferred growth of your 401k retirement funds.

 

401k rollovers into Roth IRAs cannot be done directly. You are only permitted to rollover into a traditional IRA, but funds may be subsequently transfered from a traditional IRA to a Roth IRA. Converting from a traditional IRA to a Roth IRA is a taxable event -- you will have to pay taxes on the amount converted -- and there are income limitations on your ability to accomplish a traditional to Roth IRA conversion. If you choose to convert your 401k to a self-directed IRA, you can use your IRA funds for real estate investing and shelter your profits with all the tax advantages provided by an IRA.

 

All 401k rollovers are tax and penalty free, however you typically must have a 401k from a previous job as only rarely will companies allow rollovers of your retirement funds into an IRA for active employees. If you are an active employee for the company sponsoring your 401k, then your next conversation needs to be with your plan administrator to determine what options are available to you -- both for the permitted investments within your 401k and your ability to rollover to an IRA

 

If you are not permitted to convert to an IRA because you are an active employee, perhaps a 401k loan will work for you. Many 401k plans offer participants the option of taking a loan from their vested account balance. Some plans will allow loans for any purpose, while others may restrict use to paying medical or education expenses, to prevent home foreclosure, or to finance a first home, additionally spousal consent and automatic payment via payroll deduction are sometimes required. Loans are available for up to 50% of your vested balance or $50,000, whichever is less and must be repaid with interest within 5 years, except when borrowing for a first home where additional time may be allowed.

 

On the downside, your debt must be quickly repaid upon leaving your job to prevent defaulting. Defaulting on a 401k loan will incur the same penalties as a 401k early withdrawal: income tax and a 10% penalty.

[shell1ton 0]

If you choose to convert your 401k to a self-directed IRA, you can use your IRA funds for real estate investing and shelter your profits with all the tax advantages provided by an IRA.

Thanks, that's exactly what I was trying to remember.

This is what I've done. My former employers were bought out by a competitor, and I rolled everything into a self-directed IRA, then began a new 401K with the new owners.

I had only been contributing for a few years, so there is not a huge sum to pull from. I was thinking that the right real estate investment might boost it further faster than the miracle of compounding interest. (Especially the miracles I invested in, stay away from fuel cells and satellite radio )

 

If I choose to fund a real estate investment with this money, can it be partially funded by monies from another source? Or does it need to be wholly funded by the IRA so that the accounting is simpler to figure out?

[Dave T 0]

If I choose to fund a real estate investment with this money, can it be partially funded by monies from another source? Or does it need to be wholly funded by the IRA so that the accounting is simpler to figure out?

As a general rule, all investments within your IRA must be funded from within your IRA to avoid any tax issues.

 

If external financing is needed, then you need to have this conversation with your IRA custodian. Even though your IRA may be self-directed, your IRA custodian must be the principal in the deal (on behalf of your IRA). The IRA custodian has dealt with all the aspects of IRA investing and can be more specific about the tax pitfalls of IRA investing with external funding.

 

Perhaps the custodian can give you suggestions on how the IRA can buy stock in your corporation or hold the paper for a loan that would not create a tax consequence for you.