Today’s REI Classroom Lesson
Clint Coons goes over how to have business access to your IRA without paying taxes. Learn the do’s and don’t’s so you’re able to utilize IRA money to your benefit.
REI Classroom Summary
Find out how much you can access, what you aren’t able to access, and how you must use the IRA funds.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
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.
Clint: Hi. Clint Coons with Anderson Business Advisors, host of the REI Classroom. And in this segment, I’m going to be talking about tax-free access to your IRA.
Mike: This show was sponsored by passiverental.com.
Clint: Now, I’m sure you’ve been told you can access your IRA, but you can only do so for a limited period of time, that is 60 days. I deal with a lot of real estate investors who tell me they have a lot of money in their IRA, and they’d like to be able to access it, and use that money outside of their IRA. But they don’t want to pay the penalty for pulling it out early if they’re under age 59 1/2, nor do they even want to pay taxes on it because you know, if you don’t have to pay taxes on the money, your money is going to go further because you have more to invest with.
Well, believe it or not, there’s a way for you to gain access to your IRA if you know how to set it up the right way. And it does not involve using your IRA. Now, the only limitation here is that we cannot do this strategy that I’m about to share with you with a Roth IRA. This has to be a traditional IRA. Now, the strategy I’m about to talk about is something I’ve been looking at for years, and I’ve known about it, but just haven’t been comfortable discussing it with my clients up until this point because there just wasn’t enough case law behind what I’m about to share with you.
I can tell you, once you find out about it, you’re going to want to go out there and set this up because I’m going to give you an opportunity in order to gain access to all of your IRA monies to use them in your real estate business tax-free, that is you can access your money tax free. The way it works is as follows: number one, you need to set up a new C corporation. So you set up a C corporation whose business purpose is going to be real estate investing. Once you’ve established the C corporation, you’re then going to become an employee of that corporation. Now, if you’re an officer of your corporation, which most of us are going to be, then you’re, by law, an employee of that corporation.
Now, once you’ve established your new C corporation, you don’t want to issue stock yet, you’ve got to hold on to that, you’re then going to go out, and sponsor a qualified retirement plan. In some of my other segments, I’ve talked about the benefits of using a qualified retirement plan over a self-directed IRA, well, here is another benefit. Once that qualified retirement plan is established, you will then rollover your IRA into the new QRP that you just set up. Now, this is a very specific type of qualified retirement plan you have to create for your business, but nevertheless, it is a 401(a) plan that can be utilized for this very specific strategy.
Now, once your money’s in there, the way you gain access to it, is you have your QRP invest in your corporation. That is, your QRP will buy the stock in your newly formed C corporation, and the money that was formally in your IRA, it’s now in your QRP, will then roll into your newly formed C corporation. So your qualified retirement plan actually becomes a shareholder in your company.
Now, once that money rolls into your corporation, it goes right into your corporation’s bank account, it’s a non-taxable event because your QRP made an investment into your corporation. Now, once that money’s in there, you just can’t take it out and use it personally. That would be a prohibited transaction. But you can use that money now to go out, and buy real estate, flip properties; it’s available for your business.
And the profits you make off that money, you can then use those to pay yourself a salary, set up a fringe benefit plan for yourself, even fund your QRP based upon the salary you’re withdrawing from your corporation. So you can have complete, 100% access to the money that’s currently sitting in your IRA for the use in your business by setting up this very particular strategy that I just shared with you.
Now, if you’re wondering why I delayed in bringing this out to my clients and individuals whom I speak with, well, it’s because I hadn’t seen enough court cases on it blessing this particular strategy. Over the last year and a half, there have been some very favorable rulings on using this very particular strategy. In fact, the last case I read, the court laid it out in black and white to the individual. They told the taxpayer, “You did it wrong because you tried to use an IRA.” And they said, “Had you set up a corporation,” in the way I just described, they would have blessed the transaction, and given the real estate investor access to the money formally in his IRA for his real estate business.
So setting these strategies up, there’s a way to do it, you just have to know how to do it the right way. My name’s Clint Coons with Anderson Business Advisors, and I’ll catch you next time.
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