Turn your old 401(k) into real estate!

Many of us have company provided 401(k) retirement plans. When we find a better job opportunity we jump ship (or airplane) to a new employer who will also provide us with their company provided 401(k) plan.

Some folks remember about their previous employer 401(k) plan and will roll it over to the new one.

Some other folks simply forget they had it.

If the latter is you, you can do what's a 401(k) roll over into a Self-Directed IRA (SDIRA).

The advantages of rolling it over into an SDIRA is that you won't incur any taxes or penalties and you now have a list of options available to invest that you typically don't have access with a 401(k).

Here are some of the things you can invest with an SDIRA:

• Real Estate
• Tax lien certificates
• Businesses
• Precious metals
• Private lending
• Cryptocurrency

This is a short list, but in reality "Real Estate" and "Businesses" encompass so many different types of investments. You can invest in many types of Real Estate out there ranging from multifamily apartment complexes, self-storage, mobile home parks, etc.

Side note: you can't use your SDIRA to buy your personal home. Just in case you were wondering...

6 steps to set up your Self-Direceted IRA

Rolling over a 401(k) into a Self-Directed IRA involves several steps to ensure a smooth transition and compliance with IRS rules.

Here’s a general process to follow:

1. Review Plan Documents: Start by reviewing your current 401(k) plan documents. Check if the plan allows for rollovers and what specific rules or restrictions may apply. Some plans may restrict certain types of investments or have specific rollover procedures
2. Choose a Self-Directed IRA Custodian: Select a custodian that offers Self-Directed IRAs and supports the types of investments you're interested in (such as real estate, private equity, etc.). Not all IRA custodians offer Self-Directed IRAs, so research and compare custodians carefully.
3. Initiate Rollover Request: Contact your current 401(k) plan administrator or custodian and request a direct rollover of your funds into the Self-Directed IRA. This is typically done by completing a rollover request form provided by your IRA custodian.
4. Complete Rollover Paperwork: Your 401(k) plan administrator will provide paperwork for the rollover. Ensure that you request a direct rollover to the IRA custodian. This means the funds go directly from the 401(k) plan into the IRA custodian without passing through your hands (which helps avoid potential tax consequences).
5. Transfer of Funds: Once the rollover paperwork is processed by your 401(k) plan administrator, the funds will be transferred directly to your Self-Directed IRA custodian. This transfer should be completed within a reasonable timeframe, typically a few weeks.
6. Choose Investments: With the funds now in your Self-Directed IRA, work with your IRA custodian to choose investments. Self-Directed IRAs allow for a wide range of investment options beyond traditional stocks and bonds, such as real estate, private placements, precious metals, and more.

What is UBIT?

Unrelated Business Income Tax (UBIT) applies to income generated from business activities that are not closely related to the tax-exempt purposes of an organization or entity, such as charitable or educational functions. If such income exceeds $1,000 in a year, UBIT must be paid. Additionally, quarterly estimated tax payments are required if the expected annual tax exceeds $500.

Not all income within an IRA is subject to UBIT; it depends on the source. For instance, rental income from real estate, dividends, investment gains, and royalties are typically exempt from UBIT. These earnings can grow tax-free or tax-deferred within the IRA, depending on the type of account. This tax advantage is a key reason why real estate is favored by investors using self-directed IRAs.

However, if a self-directed IRA utilizes a non-recourse loan to finance real estate purchases, the portion of profits attributable to the debt-financed portion will be subject to UBIT. This includes income derived from the share of ownership funded by the non-recourse loan, which must be reported and taxed accordingly.

Here is a video explainin this more in detail.

In summary, rolling over your old 401(k) into an SDIRA can be a great way to put your money to work and add some alternative investment options into your overall retirement portfolio.

If you are interest in seeing some of the deals we are working on, join our investor list today.

Satch Bernhardt

V1 Capital

Disclaimer: We are not financial advisers and/or tax planners. Consult with your own CPA, tax planner, or financial adviser if this is right for you.