William Bronchick goes over the process of investing in real estate with your IRA, from what’s legal to the fees involved.
Learn what custodians will allow you to invest in real estate and the benefits of having real estate in your IRA.
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.
Bill: Hi, I’m attorney Bill Bronchick, one of the REI Classroom instructors and host of Legalwiz.com. Today we’re going to be talking about how to use an IRA to buy and sell real estate without paying any taxes. Many of you may have an IRA or a 401(k) or some other type of retirement plan that maybe you’re not using, such as an old 401(k) from an old employer, or an IRA that you may be contributing to but you’re not getting the returns you’re looking for, or you’re just afraid to put it in the market. Real estate is a great place to invest that type of money.
Now the first thing that we have to discuss is well, is it legal to invest in real estate in your IRA or 401(k), and the answer is yes. In fact, the IRS only has two things that are specifically excluded from investing within your IRA, and that is collectibles, stamps, artwork, old cars, baseball cards, comics, or insurance, life insurance policies. And that’s basically it. Everything else is fair game. Real estate, private investments, private loans, tax liens, pretty much any kind of real estate investment.
So what the process involves is you have to get your money away from the big custodians like TD AmeriTrade, Schwab, Fidelity, etc., because if you ask them “Can I invest my IRA in real estate?” They’re going to say “No, we don’t do that.” And why don’t they do that? Well not because it’s not legal, it’s just they don’t make money off of that.
The reason they don’t mention that you can invest in real estate is because they’re not real estate brokers and they don’t get a brokerage fee out of it, so there’s no way in heck they’re going to tell you that you can invest in other things than mutual funds, stocks and bonds, and everything they get money off.
So what it involves is changing the custodian of your money, of your account. You have to first liquidate it to cash and then transfer that to another custodian, boutique custodian, and there are many them, that will host your account, like Fidelity or your Schwab will, but will let you invest in a broader range of investments. Anything except for collectibles or insurance.
Now these custodians charge a lot more than Fidelity or Schwab. You’ll be paying in the range of $300-$500 a year possibly, depending on how big your account is and how many investments you do.
However, you will find that you’re getting returns in real estate that you, if you keep investing in it you know that 20% or 30% a year is really not that tough. So you buy, fix and flip three or four properties a year, you’re making as much as a 100% a year on your money. So $300-$500 a year for your fees, not that big of a deal, okay?
So you move it to a new custodian, and then you direct the custodian to make investments. So for example, if you wanted to buy a property, the custodian would have to be, for your account, would have to be the buyer on that contract. If you’re going to lend money, the lender on the note would be your account. And all the money goes from your account to the investment, and then back to the account tax free.
Now this is the same as you so with Fidelity or Schwab. The money goes from your account to a stock or mutual fund, then back to the account. All the money is tax free as it’s earned. You can’t take the money out and spend it personally until you reach retirement age. So when it’s retirement age, you can take a withdrawal, but in the meantime, all profits earned inside of the vehicle stays tax free and stays in the vehicle.
So step one, we’re going to move it to a new custodian, and then step two we find investments to direct that custodian to go and buy on your behalf or actually on your IRA account’s behalf.
This is Bill Bronchick and I hope you’ve enjoyed this discussion on how to invest tax free in your 401(k) or IRA.
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 investment, please visit FlipNerd.com/ugly to learn more.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers, or affiliates. Be consult professionals before making any investment or tax decisions, as real estate investing can be risky.
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