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  • Writer's pictureVivek Sagi

Step by step guide to use retirement funds for investing in real estate

Updated: Dec 31, 2020

Did you know that you can invest retirement funds to invest in startups, buy precious metals, invest in commercial real estate or buy crypto currencies?

80% of investors that partner with us do not know this when they first start working with us. So, let's look at what's possible and a step by step guide to investing this way.

Let's start with a Self Directed IRA.This is an IRS sanctioned Individual Retirement Account that gives you increased control and greater diversification over your investments and retirement savings. Unlike other IRAs held at banks, brokerage firms or other institutions, you’re not limited to stocks, bonds, or mutual funds. A Self-Directed IRA allows you to take advantage of investing in alternative assets. Some examples are:

  • Real estate.

  • Undeveloped or raw land.

  • Promissory notes.

  • Tax lien certificates.

  • Gold, silver and other precious metals.

  • Cryptocurrency.

  • Water rights.

  • Mineral rights, oil and gas.

  • LLC membership interest...etc

You’ll need a custodian or trustee to administer your Self Directed IRA account and they serve a passive role, i.e. passive custodians do not offer investment advice. The self-directed IRA investor (YOU) have the responsibility to find and choose an asset, carry out due diligence and direct the investment.

There are many custodians or trustees for you to choose from. We've personally used and recommend either RocketDollar or TheEntrustGroup to our investors. Here is how they compare:

RocketDollar is an Austin based startup and we like their simple pricing model and ease of setup. They are better suited for experienced investors or those looking to invest with 3rd parties where there are no concerns about prohibited transactions with family members etc.

If you choose to go with them we recommend signing up for the 'Gold' plan. You will come out ahead because that includes 4 free wire transfers per year, which will cover your quarterly dividends. Otherwise you would pay $130 for those wire transfers with Entrust.

You can use this referral link when opening an account along with the coupon code DKRYZANOWSKI to save $100 off your account setup fee.

Entrust has been around for much longer and we suggest our investors use them when they have multiple family members investing; with some family members in management roles or when there are concerns about prohibited transactions. Their team will vet an investment to make sure it is compliant with IRS rules. RocketDollar does that too but not proactively.

To setup a self directed IRA with either of them you will need to do the following:

  1. Create an account online at RocketDollar or TheEntrustGroup

  2. Fund your Self Directed account. This will involve the following steps: i) Contacting your current retirement plan administrator and filling up a form asking them to send funds to your new account and ii) Submitting forms to your Self Directed account provider giving them permission to accept funds. Note: Completing this can take 2-3 weeks. Please plan accordingly.

  3. Once you have funds in your new Self Directed account you will ask your custodian to make an investment. You will have to submit information about the investment, which will be provided by us. Once that information has been verified by your Self Directed custodian a wire transfer will be made to the investment. Note: Ownership in the investment will be held by your Self Directed account and not you individually. All dividend payments and proceeds at exit will be paid into your Self Directed account.

The best way to think about using your retirement funds for a real estate investment is as a diversification strategy whereas if you were to use cash it would be as a net new investment.

Update: 12/31/2020 - Taxation

There are three terms to be familiar with: Unrelated Business Taxable Income (UBTI), Unrelated Debt Financed Income (UDFI) and Unrelated Business Income Tax (UBIT), which could be applicable to investments from your IRA account.

Let's say we plan to sell the project at the end of year 3 and we take 75% debt with 25% equity to buy the property.

We will issue a K1 to your Self Directed IRA each year for the duration we own the project you invest in .

Since we expect the depreciation, interest expenses to be greater than your cash dividend payment this is expected to result in a negative total income shown on your K1s for year 1, 2 and 3. In addition, your investment is passive, i.e. you will not be actively managing the property. Therefore we do not expect there to be any UBTI due during these years.

However, since most multi family purchases use leverage through non-recourse debt you need to be aware of potential tax implications on your IRA account through UDFI and UBIT.

When we sell the property at the end of year 3 there might be UDFI income generated and this will be reported on your K1 for the year of sale. The amount of the UDFI income will be calculated as your total gain from the sale * the portion that was financed through debt (which is 75% in this case assuming an interest only loan). The non debt-portion of the gain (i.e. 25%) will be the equity you put in and will not be taxed.

There are two components to the taxable UDFI: i) Depreciation recapture that might be taxed at a maximum rate of 25% (current law) and ii) remaining long term capital gains that might be taxed at the long term capital gains rate.

These taxes will have to be reported by you to the IRS on a form 990-T and the tax amount will need to be paid out of the proceeds from the sale deposited to your IRA account.

Your CPA and you will need to file that 990-T form.

NOTE: Please use the above only as informational and check with your CPA for actual tax advice for your specific situation.

Please contact us at if you need more information about investing using retirement funds.

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