Buying a Retirement Home Using Your 401K

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Dmitriy: Hello, my name is Dmitriy Fomichenko with Sense Financial Services and I’d like to welcome you to the real estate investment classroom. And today, we are going to be talking about buying a retirement home using your IRA or 401(k).

Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.

Dmitriy: So how do you buy a retirement home using your IRA or 401(k)? First, you need to create what’s known as the self-directed retirement account. It can be self-directed IRA or self-directed 401(k), specifically self-directed solo 401(k). Self-directed retirement account allows you to purchase any type of investment inside of your retirement account. It allows you to go beyond typical stocks and bonds and mutual funds that are allowed within your conventional retirement account.

So when you set up a self-directed solo 401(k) plan or self-directed IRA, you can invest in virtually any type of investment opportunity. And before the home can be used for the retirement, you need to buy an investment property or that property that you intend to use as your retirement home will need to be an investment property first while it is inside of a retirement account because the rules do not allow you to personally use that while it is inside of a retirement account. So once you buy your investment property inside of your IRA or 401(k), you can rent it out, your retirement account, you’ll benefit from that. All the cash flow, you’ll be going back into your retirement account, and it’s going to be growing over the years.

Now, once you retire, then at that point you can take what’s known as in-kind distribution. So instead of taking the cash out of your retirement account, you can actually pull out the property as a distribution. This will be a taxable event assuming that this was a pretax account like a traditional IRA or a pretax 401(k). If you do that inside of a Roth account or Roth IRA or Roth 401(k), then that will be a tax-free event. But when you take a distribution, you’ll have to appraise the property, get the value of that and that will become a taxable event.

But when you pull out the property out of the 401(k), you transfer in the title from the 401(k) or from the IRA now to you personally, you pull in account of the retirement of the retirement account. Again, it’s a taxable event if it’s a pretax account, if it’s a Roth, it will be tax-free. When that happens, the 10-99 will be issued for the amount of distribution so you have to pay the taxes, but then the property once it becomes your personal property can be used for your personal needs and it can become your retirement home.

It’s a really good strategy, not going to work for everybody, but some people will find it way useful, and I get questions about that. Again, to summarize, you need a self-directed IRA or 401(k), you need to buy an investment property that you will designate to be used as your retirement home in the future. Then when you retire, you take the in-kind distribution of the property from the retirement account to your own personal name. You transfer the title, the 10-99 is generated a report in that distribution as a taxable income, if it’s traditional, if it’s a Roth, no taxes, and then it becomes your personal property and you can use that as the retirement home.

I hope you enjoyed this class, and I will see you on the next show.

Mike: HomeVestors, the We Buy Ugly Houses folks, is a franchise system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level, or whether you have no experience at all but a burning passion to be successful in real estate investing, please visit flipnerd.com/ugly to learn more.

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