Using Your 401k/IRA to Purchase a business or Commercial Property
Few investors/entrepreneurs realize that they have the ability to self-direct their IRAs and 401k plans into real estate and other assets. Most believe that there are only two options available to them if they want or need to access capital from their plan/s, namely, either borrowing from the account or withdrawing some portion of the assets. Borrowing involves repaying the principal and interest and a withdrawal may be subject to a pre-distribution tax and penalties. There is another way…
The Employee Retirement Income Security Act (ERISA), which created the IRA in 1974, places surprisingly few restrictions on how retirement money can be invested. Except for life insurance or collectibles—such as artwork or coins—IRA funds can be placed in just about anything. Tens of thousands of investors have switched their retirement savings to self-directed accounts since the stock market correction of 2000 and 2001. By some estimates, 3% of the $3.5 trillion held in IRAs is now in alternative investments—and the number is growing.
A Retirement Account Facilitator can help you and your lawyers create the legal structure, such as a LLC (Limited Liability Company) or C Corporation that allows for checkbook control of the funds. They will form a new Self-Directed IRA and roll over existing 401(k)/IRA funds into the newly formed plan. The Facilitator, unlike the Custodian, doesn’t hold the funds, but usually contracts with a Custodian to hold the funds as part of the services provided. Custodians have become expert at structuring self-directed accounts and streamlining the once onerous paperwork.
Here is how it works… A qualified facilitator of Self Directed Retirement Plans will form the new Corporation which will own the business asset/s. The new retirement account invests directly into the new business by purchasing as much as 95% of its stock, providing the necessary capital to fund the down payment or even purchase the property. The new retirement account actually purchases the stock of a company you control, much as if your IRA were to purchase shares in a publicly traded company.
Here are the benefits… you do not re-pay a loan which adds to overhead and you will not incur tax liabilities and penalties. Profits will flow into your retirement account and will be sheltered proportionate to how much stock it owns in the corporation and ultimately, any gain from the sale of the property will be tax deferred in the same way.
Note: When the cash requirement exceeds the capacity of just one investor or where multiple investors are required to invest in a single project, one self directed 401k plan may be created to accommodate multiple roll-overs for investors who wish to participate in your venture.
Custodians don’t offer investment advice—that’s the self-directed part. No outsider can guarantee the soundness of your investment strategy and that can be as terrifying as it is liberating. As always, talking with a good financial advisor who is knowledgeable in your area of interest is important. Unless you have both time and capital to spare, you should be cautious before putting your entire nest egg into a new business. However, investors with a strong do-it-yourself streak and a compelling alternative investment strategy may want to consider joining the growing ranks of people who have decided to invest their retirement funds in themselves.
To arrange for a detailed review of your plans and qualifications, please call Rick Newman 609-759-1050
The material contained in this overview is provided for your general information and should not be acted upon without prior professional consultation with the appropriate experts.