I am very against 401Ks because you can only choose from crappy option that have heavy fees.
I don’t really like Self Directed Roths or any tax sheltered retirement accounts either because you are subject to UDFI (more details below) and cannot leverage your investment which is a pillar in real estate investing. If you want to do one here is a big list of them. Knock yourself out but I cashed out mine a while ago because I plan to live off my cashflow and retire well before the Government allows you to tap into your retirement account.
If you have distrust on where this country is going you need to expect that taxes will go up in the future. How else will we pay out for all these bank bailouts and quantitative easing.
Why cash out your retirement and use it to invest
You will pay taxes now or later and you will likely to pay more taxes in the future because you will make more money… so pay it now. Most people think they will be in a lower tax bracket in the future because they plan to downgrade their lifestyle… this is again incorrect money myths that are so prevalent.
By taking you money out early you will incur a 10% penalty but if you understand how you can easily get 20-30%+ returns in real estate a year that 10% penalty is nothing. You can recoup that in 6-18 months.
It’s a no brainer… the numbers don’t lie. Do the math.
But my family will disown me!
Yes taking money out of your retirement account is a sin for most people.
In-Service Withdrawals (401k)
Unless you are age 59.5, fired, die, or leave your current employer you company sponsored/owned 401(k) are stuck where they are.
In-service withdrawals can be made as a hardship withdrawals if the plan allows if there is a “immediate and heavy financial need” per the IRS. Straight forward examples of these are medical care expenses, or educational costs and payments needed to prevent eviction from a principal residence. You just need to be able to explain how you exhausted all other distributions or nontaxable loans under the plan. You can only take our the employee’s elective contributions. The income or the money that you made can’t be taken as a hardship withdrawal. If the plan allows, the employer’s matching and discretionary contributions can be factored into a hardship calculation.
Most withdrawals will have a 10% early withdrawal penalty however, the 10% premature penalty tax can be waved if the in-service withdrawal or hardship distribution is used to cover medical expenses that exceed 7.5% of adjusted gross income (AGI) or if it is used to make a court-ordered payment to a divorced spouse, child or dependent. Other exemptions are defined by the IRS.
Read up on the IRS website, ask your HR department, and make sure you talk to some who gets it.
The Silver Bullet
QRPs or qualified retirement plans (Solo 401ks, checkbook IRAs, etc) are the answer to that person with a bunch of money in their existing 401K or IRA.
It’s pretty typical that someone listens to the Simple Passive Cashflow podcast, signs up for the investor club, and books a free intro call has 200k-600k locked up in garbage retail investments AKA 401K.
Stop whatever you do don’t roll over an old employers 401K into your current employers 401K. If you have money in your current employers 401K its stuck there. You need to quit your job. Well there is this one obscure tactic if you live in a Red state that could work but for you it’s easier to take a loan from the existing 401K to start investing in hard assets.
Anyway let me know you would like a referral to my checkbook ira contact. Or check this out to get a free book.
More reason why…
If you are conservatively using prudent leverage and finding decent deals there is no reason you should not be able to retire in 10 years or less and thus negating the very reason for these accounts that you can’t touch till you are old.
When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using SDIRA’s you have to get second tier financing options because its more risk for the bank, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!
Caveat: If you are late to the game and already have a 401k over $100,000 then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.
I work with people to come up with a strategy to withdraw their 401k to minimize taxes. Sometimes we need to get creative with oil & gas investments, land conservation easements, or bonus depreciation.
Let’s say you choose to make an early 401k withdrawal of $100,000. (You personal tax bracket will be different):
- Federal income tax of 25% = $25,000
- State income tax of 7% = $7,000
- Penalty tax of 10% = $10,000
Technically you can get a early withdrawal but withdrawals made under the age of 59½ will not be subject to the 10% early withdrawal tax under any the following circumstances:
- You pass away and the funds are withdrawn by your chosen beneficiary
- You become permanently disabled
- You terminate employment and are at least 55, or 50 if you work for the government
- You withdraw an amount less than is allowable as a medical expense deduction
- Your withdrawal is related to a Qualified Domestic Relations Order after a divorce
- You begin a series of “substantially equal payments”
- You are a qualified military reservist called to active duty
What is a QRP Retirement Plan? It’s a tax-sheltered investment vehicle that you can invest in pretty much anything where your money grows tax-free but it is intended for retirement and the downside (why I don’t do one personally) is that you can’t touch the money until you are old 🙁
If you have a 401K or Roth or IRA you need to start using a QRPs or qualified retirement plan!
If you are running low on cash because you have been picking up deals left or just broke because you have been listening to mainstream dogma and you have money in your retirement plans this is for you!
Damion Lupo was a previous guest on episode #40
Here is the webinar! Enjoy and send me questions to post the answer below.
If you are late to the game of investing in alternative investments like real estate (imagine that) and already have a large 401K over $100,000 then you should convert it to a Solo401K or Solo401k Roth version. At that point you can slowly take money out to minimize your taxes (not go into the highest tax bracket) and invest in the meantime as you “leak” the money out of the Governments control.
Follow up to Hui Questions for the QRP and other retirement plans
What I personally do
My order of contributing to these (future money) accounts after you take of (today money) regular liquidity. [I suggest per hour Coaching]:
1st QRP – contribute at least until the match.. 100% return
2nd IRA – Flexibility to self-direct
3rd SERP – liability of the employer.. pays out when you leave or after retirement age or a designated age in the future
There are a couple caveats to point out:
- When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using the QRP loans get you the second tier financing options, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!
- QRPs like your 401Ks or IRA accounts is pretty much locked up until you are “old”. There are some provisions to get the money out when you are 45 years old but you need to eat today. So I recommend a holistic strategy of blending your investment funding from both QRPs and you regular liquidity. We can likely discuss this in a quick 1-hour coaching call.
Info on using retirement funds for syndication deals:
Question: I am considering investing in a 506c investment on a multifamily property. They are raising a 1 million from investors, then getting a loan and making improvements to the property and repositioning it over 5-7 years. I wanted to use my funds from my SEP IRA which is currently in a qualified intermediary trust. What is the UBIT tax? Will I be subject to that on this deal? Also, should I set up an LLC that then loans the money to their LLC? How can I structure this for tax and liability benefits?
Answer [Note: From CPA and not this is NOT legal or professional advice]: When you invest in a business (syndicate = business) with your IRA, the IRA will be subject to UBIT (unrelated business income tax) and UDFI (unrelated debt-financed income).
For our purposes, UDFI is produced when an IRA uses debt to purchase real estate. Essentially, the portion of the property’s income considered UDFI is based on the percentage of rental income derived from debt.
For example, Property A is purchased for $100,000. You put down 25% of the purchase price as a down payment and finance the remaining 75% with a traditional mortgage from the bank. The property produces $10,000 in net income for the year. $7,500 (75%) of the net income is considered UDFI and is subject to UBIT.
There is a deduction for the first $1,000 of income subject to UBIT. Income subject to UBIT over $1,000 is taxed at trust rates. For 2017, trust tax rates start at 15% and max out at 39.6% after just $12,400 of income subject to UBIT.
UBIT is paid by the IRA account. If for whatever reason UBIT is paid directly by the taxpayer, the amount paid is considered a contribution to the IRA.
Follow up question: Is there any difference in how the UDFI will apply for these:
1) SD IRA
3) Solo 401K
4) SD IRA (operated as an LLC) so this one is confusing… My LLC owns an LLC (syndication) which owns a property such as 150-unit on 123 main street
Question: I’m trying to decide if one is better than another for tax purposes?
Answer: The solo 401(k) is not subject to UDFI but it subject to UBIT. The IRAs are all subject to UBIT and UDFI. Note that generally the passive income flowing back to you is very low and the, as a result, we don’t see a huge UBIT tax.
Another idea would be to take a debt position (lending) rather than equity. The interest you would receive is free of UBIT and UDFI tax.
(This suggestion of a “debt” position or note investment with the SEP IRA to avoid UBIT and UDFI tax is a creative one… but it’s a very low chance of happening because it’s just too complicated and honestly not worth the effort from the syndicators’ side. It’s a very similar case of to a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It’s possible but from the syndicator’s perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor)
Ask you can tell this is a really grey area. One CPA mentioned, the answer depends on how you structured the syndication, UBIT may or may not apply for the real estate holding for solo 401k. I would really try to toss the Operation Agreement to your individual CPAs to examine and determine ahead of time as I am not a CPA 😉
Caveat: If you are late to the game and already have a fat 401k then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.
So if you are going to have one of these QRP accounts since you have an old 401K or old retirement accounts want to self-direct it in good investments and don’t want to take a huge tax hit right away set up a Solo401k or Checkbook control.
Hey Lane! I asked my CPA [who actually knows what they are doing… let me know if you want a referral] and here is what they said… [my additions]
Converting Roth IRA into Traditional IRA is called “Recharacterization”. It is not as common as Traditional IRA –> Roth IRA, due to the tax benefit of Roth IRA.
In 2018, as part of the Tax Cut and Jobs Act, recharacterization of Roth IRA conversions from traditional IRAs and qualified plans (e.g., 401(k)) was repealed. As a result, all Roth conversions taking place on or after January 1, 2018 are irrevocable. But recharacterizing Roth contributions is still permitted. For instance, a traditional IRA contribution can be recharacterized to a Roth IRA contribution and vice-versa.
Prior to January 2018, an investor had four available recharacterization options including: (1) traditional IRA contribution to a Roth IRA, (2) Roth IRA contribution to a traditional IRA, (3) conversion of traditional, SEP, or SIMPLE IRA and (4) qualified plan (e.g., 401(k)-to-Roth IRA conversion to a traditional IRA). Under the new rules, the list of options has been reduced.
According to the IRS, a Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018. A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized, the IRS says. For details, see “Recharacterizations” in Publication 590-A, “Contributions to Individual Retirement Arrangements (IRAs).”
- Get a quick pay per hour coaching call to see how this plays into deals coming up in the Hui Deal Pipe Club.
- Get set up here or ask me for a warm email intro.
- And get the free book on QRPs!
Here are the podcast notes:
To get to know Damion more go to SimplePassiveCashflow.com/damion
I have been having a lot of calls with listeners having exhausted their liquidity and have money in their 401K or IRA’s still in Wall Street Investments.
One of those ways to get the money out is via a QRP or Solo401K.
Today’s guest Damion Lupo with discussing – SimplePassiveCashflow.com/qrp to get a free copy of his book
I cashed out my 401k because I figured I was going to pay the taxes anyway and my tax load would be a lot higher in the future and I wanted access to my money before retirement age.
Visit CrowdfundAloha.com – a website dedicated to helping hard-working middle-class people build real estate portfolios.
$26 trillion in retirement plans. You have all sorts of money that can be tapped into, but fear holds you back.
As an investor, Damion has purchased 150 houses in 7 states ($20 million portfolios).
2008: went from $20 million to -$5 million. Had to start all over.
Beyond money, find out your why. Read Simon Sinek “Find Your Why.”
Mission Statement: Free 1 million people from financial bondage.
I.R.S takes 70% of the average person’s money.
The QRP (Qualified Retirement Plan): “The Ferrari of 401(k)’s.”
You probably haven’t heard of QRP as Wall Street tends to control your stuff.
QRP allows you invest in many real estate options (syndications, lands, rentals, apartments, commercial, international deals, HML, etc.).
Total control, fixed fees, endless choices, and FAST with QRP v. Self-Directed IRA. 10X contributions and control with no custodian.
SDIRA will lose 1/3 of profit as UDFI triggered. QRP – Roth has no UDFI – keep 100% profit.
Can keep 401(k) at W-2 and sign up for QRP. Max contribution would be $55,000 in combined plans – $28,000 in the QRP.
QRP can hold other non-real estate investments, such as gold, silver, Cryptocurrency, etc.
Build-in credit line in a QRP. Up to $50K in cash.
Investors, self-employed, and family members are all qualified.
Properties you have or use right now cannot be placed moved in a QRP.
To fund, can rollover any IRA, 401(k), +TSP, 403b, 457.
66% people are worried about not having enough money for retirement.
Free copy of QRP book at www.simplepassivecashflow.com/QRP