Growing old is not an option. We don’t have a choice. But we do have choices that will greatly affect our quality of life for the rest of our life.” ~ Henry K. Hebeler

Saving for retirement could be a bit overwhelming for a lot of people but like Mr. Hebeler said, you cannot, certainly, avoid getting old. For real estate investors, one of the preferred ways to retire is to create a portfolio of properties that could fund your retirement once you are old. While that’s an excellent strategy, you will end up spending a lot in tax payments, depriving you of the compounding growth effect.

Being a retirement solution company, one of our prime objectives is to allow our customers gain financial freedom. As a real estate investor, buying properties within a retirement plan could do the trick for you.

Wait! Are you saying that I can buy real estate through my retirement funds?

Exactly, a self-directed Solo 401k allows you to use your retirement funds for real estate investing.

What is a self-directed Solo 401k?

A Solo 401k is a retirement account that targets owner-only businesses and self-employed individuals. It allows higher contributions of up to $59,000 in 2016 and a Roth contribution option irrespective of your current income levels.

A self-directed Solo 401k, unlike a Solo 401k, allows account owners to practice complete discretion over their investment choices. You can invest in pretty much anything starting with real estate, mortgage notes, tax liens/deeds, precious metals, and the traditional stock and bond investments.

Find out more about Solo 401k eligibility

How you can buy a retirement home with your self-directed Solo 401k

The IRS allows you to invest in real estate through retirement.

What? Why haven’t I ever heard of it?

While the IRS permits real estate investing through a retirement account, it doesn’t require financial institutions to offer this option to the customer. Further, financial institutions are businesses built to profit, and they profit when you invest in their financial instruments including stocks, bonds, mutual funds etc. They don’t get any incentive or, for that matter, fees for real estate investments.

A quick Google research will help you find Solo 401k providers that allow alternative investments like real estate. Start by opening an account and rollover your retirement funds after the setup.

5 Steps to Buy Retirement Property with Your Self-directed Solo 401k

  • 1.Open a Solo 401k: Start by opening a Solo 401k account and fund it through qualified rollover or contributions. The last date to open a self-directed Solo 401k is December 31, 2016 for investors who plan to make contributions for financial year 2016-2017.
  • 2.Identify an investment property: Much like any other real estate transaction, find out a real estate property that matches your criteria. Keep in mind that your self-directed Solo 401k plan will hold the title of the property, so it’s best to seek professional advice.
  • 3.Purchase using retirement funds: Once the property is ready, you can purchase it using your retirement funds. It can be done through a wire transfer or writing a check. The entire purchase amount must come out of the retirement plan only. If you’re short on funds, use a non-recourse loan only.

List of Non-Recourse Lenders for Self-Directed IRA and 401k

  • 4.Pay maintenance/repairs through Solo 401k plan: The entire closing costs and any maintenance throughout the life of the property should come out of the retirement plan only. Any income generated by the Solo 401k plan goes back to the plan only and enjoys tax-deferred growth until retirement.
  • 5.Distribute property at retirement: When you are eligible for retirement distributions, you can either distribute the property to yourself or sell it and take the proceedings. When distributing the property, you will have to pay due taxes and afterward, your retirement home is all yours.

Use a self-directed Roth Solo 401k to maximize your benefits

If you opted for the Roth option in your self-directed Solo 401k, you won’t have to pay taxes at the time of distribution, which means, you will bag the entire rental income tax free. Further, considering the fact that you purchased this home using after-tax dollars, you can distribute the home without paying any taxes.

Solo 401k Roth Conversions of Real Estate Properties

Tell us more about the tax-saving strategies you use for retirement!

Written by: Dmitriy Fomichenko

Dmitriy is the founder and president of Sense Financial Services LLC, boutique financial firm specializing in self-directed retirement accounts with checkbook control. He began his career in financial planning and real estate investing in 2000. He owns multiple investment properties in various states and is a licensed California Real Estate Broker. Over the years, he has instructed hundreds of investment and financial planning seminars and has mentored thousands of investors.