purchasing real eastate with 401k
I have a client who has a 401k from a previous employer. She wants to purchase some property and take the money from her 401k to use for the purchase. Can this be done and if so does it have to be paid back?
I have a client who has a 401k from a previous employer. She wants to purchase some property and take the money from her 401k to use for the purchase. Can this be done and if so does it have to be paid back?
Permalink Submitted by Alan - IRA critic on Thu, 2013-04-25 17:24
She should contact a self directed IRA firm such as Entrust or Guidant. They can assist with rolling the 401k over to the self directed IRA, and then purchasing rental (cannot be owner occupied) property.
Permalink Submitted by mk foss on Thu, 2013-04-25 17:42
It takes discipline to invest in real estate with retirement funds, thre are many things that can go wrong resulting in taxatiom and penalties. The self-directed IRA owner cannot use the real estate or allow a related person to use it. All operating expenses must be paid from the IRA – paying the property taxes with outside funds can be a problem fo example. This type of investment must be very carefully done.
Permalink Submitted by Curtis DeYoung on Thu, 2013-04-25 19:36
Joekar – Your client will need an expert administrator to help complete the process. My company, American Pension Services (APS) has specialized in the administration of self-directed retirement plans since 1982 and because we do not sell investments there is no conflict of interest between us. I would be happy to speak with you directly about her options. You might also take a look at the October 2012 Ed Slott’s IRA Advisor newsletter article, Making the Most and Avoiding the Worst of Self-Directed IRAs. To address your questions: If she moves the funds from her 401(k) into a self-directed IRA, or 401(k) she can purchase the real estate in the name of the retirement plan thereby maintaining the tax advantaged nature of the IRA or 401(k), avoiding a taxable distribution, and enjoying the tax-advantaged growth of the real estate asset. She should not take the funds out of the retirement plan to complete the real estate transaction and expect she can then attempt to “pay the plan back” – that would simply be a taxable distribution. Self-direction is a tool for your sophisticated clients with specialized knowledge of unique assets that will allow them to invest their IRA and 401(k) funds in what they know. Self-direction is not for everybody. Curtis DeYoung Founder, President, CEO – American Pension Services, Inc. – 801-938-8120 – http://www.americanpension.com
Permalink Submitted by Henry Glodny on Thu, 2013-05-02 00:01
I am trying to perform some due diligence in the area of self-directed IRAs, by confirming whether a given non-bank entity has been approved by the IRS as a trustee or custodian.I found the following page on the IRS Website: http://www.irs.gov/Retirement-Plans/Approved-Nonbank-Trustees-and-Custodianswhich has a listing of approved firms. The one I am interested in is called Equity Trust Company. They describe themselves as being a “passive self-directed IRA custodian”. Neither they, nor Entrust, nor Guidant, appear on this list. Why not?I have spoken to two people at the IRS about this and they referred me to their email dropbox: [email protected] response I received was more of a non-response:”Your inquiry is not within the scope of our sites service. If you are trying to determine if a nonbank entity is approved by the IRS to act as an IRA trustee or custodian, you may consider contacting that nonbank entity.”The whole point of this exercise was to determine this information independently of what anyone at the firm tells me.In reviewing IRS Pub. 590, I understand that a trustee or custodian must be a bank, credit union, savings and loan or entity approved by the IRS to act as a trustee or custodian. In general, I have been unable to find banks who will set up an IRA holding real estate directly. However, I have found several of these so-called “self-directed IRA custodians”.I understand and appreciate the concerns regarding prohibited transactions and disqualified persons.One potential investment I have found is a condo-hotel where each privately owned condominium unit is a fully furnished hotel suite. Each unit owner may turn over his property to the resort, according to the terms of their Hotel Agency Agreement. This agreement states that the “Owner hereby grants to Hotel Agent complete control and authority in the operation, direction, management and supervision of the Hotel Unit”.I am assuming that this type of agency agreement fulfills the requirements stipluated by the IRS (assuming unrelated parties run the hotel). Whether the underlying investment is good or not, is not my question. Buying real estate within an IRA and having it professionally managed, within the parameters established by the IRS, seems feasible.My even more basic question is how to evaluate the custodian? And the first issue then is, how to verify that any custodian is legit, approved by the IRS and will file with the IRS in a timely and accurate manner?The only other thing I can think of is whether some of these custodians have actually been chartered as banks. If so, how could I confirm that? Their state’s banking regulator?Many thanks.
Permalink Submitted by Jose Morales on Thu, 2013-05-02 16:09
You have a very valid concern, and I can tell you that in the “Self-Directed” world you will be hard pressed to get a straight answer from the entities promoting “Self-Directed” IRAs. The way it is supposed to work is that you ask them “Are you an approved non-bank IRA Custodian and can you show me your IRS non-bank custodian acceptance letter?” If they are an approved non-bank custodian they will have this letter and can show you a copy, if they aren’t they most likely not come right out and say it but offer something along the lines of “We work with IRS approved IRA custodians…”We have been approached several times by the same company (one of the ones you listed) over the years with the proposition that we allow them to use us as their “cover” so they can continue painting themselves as a true IRA Custodian when in fact they are not. Their strategy has been to establish business accounts at small regional banks and then try to filter their client’s cash through these accounts with the feeling that this then allows them to claim that these funds are held by an approved IRA Custodian. In many cases I’m sure that these small regional banks are not even aware that they are being characterized as IRA Custodians for this “Self-Directed” IRA “Administrator.” They rely on the fact that there is so little IRA knowledge at many financial institutions that they can pretty much do as they wish and not have much resistance to their actions. Unfortunately for them, we have actually invested in having top notch IRA experts on staff and each time they try to work themselves in we have successfully fended them off.
Permalink Submitted by Alan - IRA critic on Thu, 2013-05-02 02:00
I don’t know for sure, but one possibility is that these firms are “applicants” under the Regs. There is no stated period in which the IRS must respond with approval or denial. Perhaps the examination period has been lengthened given the complexity and exposure to prohibited transactions in SD IRA accounts. These few large SD IRA custodians have been around for quite some time and I am not aware that the IRS has expressed concerns with their operations. I don’t see any down side to inquiring directly to Equity Trust. You can screen their response against what you already know from researching the custodian approval Regs.