With the continuing changes in tax legislation, came a benefit for IRA contributions: The non-working spousal limit of $250 was raised to $2,000. Although an additional annual contribution of $2,000 doesn’t appear to be much, it works out to a very large amount over time considering that note returns are between 8% and 12%.
Over 20 years, a total of $40,000 contributed ($2,000 annually) works out to be about $100,000 at 8%. Of course, as IRA money, this is all tax deferred. For a married couple the additional $2,000 makes it to $200,000. Real property transactions can improve yields significantly. Property flips have been on the scene again, and some people have used their tax deferred IRAs and Qualified Plans to manage a greater than 30% return.
Real Estate and Your Retirement Plan
This return rate means that the account holder has put a lot of work into making this work. The most common method has been rehabs, using the funds in the account for the down, financing the rest for a short time period inside the plan, and then flipping the property. The hardest part is finding a lender who can understand this transaction in the first place.
Back in the “old days” of the 1980s there were many institutional lenders who understood that these were equity only loans. The lenders always had the IRA or Qualified Plan owner guarantee the loans personally. (No, the trustee of the IRA wouldn’t ever do that: there are rules about that.) In the 1990s we are seeing more hard money and private lenders step in, and lots of carry back.
So real estate investing is still a great way to make investments in your retirement plan. In fact, we are seeing more and more probably as a result of the very heated stock market. The stock market has done tremendously well, but to some it appears that a bear market may be around the corner. After all, the feverish pace can’t continue forever.
As people are making an effort to diversify, they are gravitating to real estate property and mortgages again. Some qualified plans, such as 401(k) and Profit Sharing/Money Purchase plans have been selecting fund families which are real estate oriented. Although there are not many in this group, it is a change from the last few years where most companies have chosen a diverse set of funds, not including real estate.
It’s Simple to Use Your Retirement Fund for Real Estate
So how do you do this? It’s simple. First, you have to have an IRA, SEP-IRA or Qualified Plan, such as a Keogh, or be the decision maker in a multiple employee plan such as a 401(k) that has at least $20,000. Less than that makes you unhappy because of the fees that get charged relative to the return you get. Fees for administration are usually based on the asset value in your account, and run typically $600 per $100,000 per year. It’s really a bargain when you consider the work involved.
Second, you need to have the account or plan with a custodian who allows for complete self direction. Just ask your custodian or trustee to buy a real estate note or property in your account or plan, and see the response. If you hear a “yes” answer, ask who prepares all the paperwork and who services the property. If you don’t get a blank look or a “we don’t do that,” you may have found the place you are looking for.
Third, now that you have found the right custodian/administrator, you get to do all of the hard work. A self directed plan is just that. You are the SELF in self directed. You get to find the property, or the assets that you want to buy with your plan funds. The custodian/administrator provides the plan capability and expertise to see you through the transaction and does all the record keeping, compliance and administration for your account and assets.
So this is how it works. It seems straightforward and it is. You have to follow the rules the government lays out. The big ones are that you have to qualify to have an account, you can only make cash contributions, you can’t deal with yourself and your plan, or relatives (siblings are permitted). And here’s the payoff for following the rules: The return on your assets is tax deferred, which means tax free until you start withdrawing them without penalty, usually after age 59. Yes, people can make a huge amount in their retirement plan with real estate they find. And yes, it is perfectly legal.