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  1. Jeff missed something in this piece. If you buy real estate in your IRA – at the end of the day, when you start taking distributions on your retirement savings you will be paying income tax at a zero cost basis. Buying outside the IRA allows you to satisfy and offset your tax liability as you go. And let’s not forget the added benefit of step up in basis for beneficiaries. And I haven’t even mentioned yet the ultimate intangible benefit of occupancy. Inside the IRA works great for quick turns and bare land. But for those who are considering a longer term investment or would like to use the real estate for themselves or their family, the OUTSIDE™ method is not only financially a better choice, but the only legal choice they have.

  2. Hi, Claire. Thanks for your participation in this commentary.

    Buying real estate outside your IRA allows you to attempt to offset your tax liability without being able to enjoy #1, 2, 3, 4, 5, & 6 above. Depreciation and borrowing against equity are short term solutions to long term problems.

    When you defer taxes until the point at which you are going to use the money personally, you are maximizing what Albert Einstein said is the 8th wonder of the world – compound interest.

    So investing inside an IRA means you are going to defer the taxes until you need/want to spend the money… the maximum tax deferral allows you to pay the taxes later with inflated dollars. Today’s dollar is worth about 4 cents of the dollar in 1913, so playing inflation as a tool for you instead of against you is paramount.

    Investing in RE outside the IRA (using IRA money) requires either an immediate distribution of the IRA entirely or a SEPP (substantially equal periodic payment) schedule, based on IRC 72(t)(2)(A)(iv), where you set yourself up to make regular distributions based on an IRS life expectancy table. Either way, the taxation happens earlier. Because of inflation, earlier dollars are worth more than later dollars. So paying earlier taxes often means actually paying more in taxes. And, of course, each distribution (and its related taxes) takes money out of the investment pool that would otherwise be fully compounding interest/returns (you’re not listening to Einstein).

    As far as occupancy goes, mixing an investment with personal pleasure muddies the waters of investment decisions. Under your philosophy, you might choose a beautiful property in some place with blue waters even though it has weak cash flow. Then at the end of the day you are thinking about how beautiful the blue water is. Under my philosophy, I’m making predictable, strong cash flow income (100% tax deferred) while making no distributions. While you’re enjoying your blue waters, I’m experiencing superior income at the end of my day. The reality is that you’ve spent your money, while I’ve invested mine…

    Often times beautiful properties have income performance inferior to ugly properties. For instance, if you buy a beach front home in San Diego while I buy a small duplex in the midwest, your property will be prettier than mine, but my return on investment will be prettier than yours.

    To examine the “get your beautiful retirement home now” argument even further… typically desirable properties (often those near the ocean) have weak cash flow: the price-to-income ratio is less favorable because the buyer/owner is hoping for appreciation.

    A failed plan of hoping for appreciation (instead of planning for predictable income) can’t be fixed by any tax strategy. To mix your own personal occupancy with investment encourages the acquisition of pretty properties and hopes for their appreciation. In my book that’s gambling/hoping/speculating. The paying of distribution taxes, income taxes, and gains taxes during the ownership of the property is just the nail on the coffin of the effectiveness of using the “outside IRA method” as an investment strategy.

    That said, I think the “outside IRA method” of owning RE (using IRA funds) is a great way for a person to spend their money on their retirement home. The question whose answer will vary in each person’s circumstance is “Are you intending to invest your money or spend it?” If their answer is the latter, the outside method can be wonderful.

    I am missing one thing though, and I don’t mean to be facetious (written text has a way of losing its intended tone):

    It looks like your company charges up to 4% of the IRA balance to setup the 72(t)(2)(A)(iv) SEPP payments. I can go to my accountant and he’ll setup the SEPP payments for $1000. What am I missing?

    For example, if John uses your services for his $100,000 IRA he may pay a fee of up to $4,000. If Frank uses your services for his $900,000 IRA he may pay a fee of up to $36,000. Frank is paying a fee 800% higher than John. Aren’t you simply preparing the same paperwork for both of them? It seems that Frank is paying an 800% penalty for saving and investing more effectively than John. I may be way off, and if so I’d like clarification.

    Thanks in advance for your response,

    Jeff

    p.s. To add to the litany list of discouraging consequences of the “outside IRA method”: property owned outside an IRA usually passes through probate and is subject to the “death tax”, one of the most expensive, most controversial taxes in our country. Assets inside an IRA are passed to beneficiaries outside of probate as a nontaxable event, and the receiving beneficiary can take required minimum distributions based on their life expectancy (the “stretch IRA” concept) which further defers (and reduces through inflation) taxes.

  3. Jeff,
    I want to invest in a vacation rental villa with a proven track record. The villa would eventually be my retirement home and I would vacation there before retirement. The cost is high but so is the rental income. Most of my money is in my house and IRA. I would like to be able to use the IRA funds but it seems there are negatives to both the Inside and Outside methods. Can I call your business and have a more focused discussion?
    Bob

  4. Hi Jeff,
    I just got laid off and someone approached me re rolling over my 401k funds (about $40K) into a real estate IRA. I want to purchase a residential home and pay for it in full with my 401k funds and my savings account so I don’t have to worry about mortgage payments. Can I do this? I have a house now but I can no longer afford the mortgage payments and the value has depreciated 50% and I’m also thinking of filing for BK. My 401k funds and savings money ($25k) is all the money I have and I don’t have a job. I can’t afford to make a mistake with my remaining cash as I am 52 yrs. old.

    The reason I’m asking is because I am not familiar with self-directed IRAs particularly this type of investments. Do you mind enlightening me? How does the self-determined/outside method work? I also

    I would really appreciate any assistance.

    Thanks.
    Charley

  5. Charley,

    You can’t partner your non-plan funds with retirement plan funds.

    As for the “outside method,” it’s not a method of investing, it’s a method of spending money. If you’re looking to do something tax advantageous, the “outside method” is the opposite. There’s an elaborate case study in my book (5 Steps To Freedom) that you may want to check out.

    The rest of the book may well give you some ideas on a productive train of thought that gives you profitable strategies that are tax-favorable.

    🙂

    Jeff

  6. Jeff,

    I am looking at a 401k rollover from my old employer of around 125k and buying a home (investment) to live in from now (I am 51) until retirement. This 125k would allow me to not have a mortgage and some leftover. Questions;
    1. would I have checkbook privledges to pay taxes with?
    2. do I need to make it a solo 401k?
    3. can I live in the house?
    4. protected if I ever needed to do chapters 7 or 13 ?
    Thanks,
    Ric

  7. Jeff,

    1. Can I roll my traditional and Roth Ira (about $47K) into a solo 401K?
    We manage our two rental properties as a side business to maximise the benefits of those rentals.
    2. Though we don’t make much of a profit in this business, can we utilise a solo 401K with this business?
    3. What are limitations and restrictions of buying land with your solo 401K for building our retirement home on in the future?
    4. Then, do all expenses associated with the retirement home (plans, lot prep and infrastructure, building phases, etc.) have to be funded through the 401K?
    5. If personal funds were to be used for the building expenses, would we need to and can we purchase the lot from the 401K?
    We don’t have the full amount for the land available and are not wanting to finance the purchase if at all possible. We trying to thinking outside the box.
    6. How would you handle this situation?
    Hopefully I have painted a good picture of what we are trying to accomplish.
    Thank you for your time in answering our long winded questions.
    Warm regards,
    Kevin

  8. Jeff,

    I’d like to buy an investment property and rent it out. I have enough for 25% down and to cover closing costs. How would the title be held so as not to scare off the lenders?

    Thanks,

    Vince
    San Diego, CA

  9. I am approaching 59 1/2 and have both a 401k and a traditional pension plan with a lump sum option. I’d like to invest some of these funds in real estate upon retirement. Are any of the self dealing rules different if you are actually eligible to take withdrawals? Can I do work on the property without compensation under these circumstances?

    Thanks,
    Kirk
    St. Louis

  10. Hello all!

    Business has really picked up, so if you’re really serious about getting help with your self-directed investing please call my office at 877-903-2220 🙂

    Jeff

  11. Jeff – can losses (if there are losses) and depreciation of an LCC held by an IRA be carried forward and realized at the time of a distribution of an IRA?

    Say after 15 years an IRA held RE LLC generated a net 100k, but after the depriciation say it is only 75k. And now all the moneys are sent back from an LLC to an IRA Custodian for a lump sum distribution (lump sum for the sake of simplicity only). Would taxables gains be equal to 100k or 75k?

    Thanks,
    V.

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