Last Updated on January 30, 2020
IRA Financial’s Pocket Real Estate 401k will allow you to use your retirement funds to invest in real estate directly from your mobile device or PC securely, and cost effectively. You no longer need a third-party custodian involved in every aspect of your real estate transaction. Buy, sell, or exchange real estate on your own directly from a mobile device or PC with IRA Financial’s Pocket Real Estate 401k. You can also rollover, deposit, or transfer funds between your real estate investment and 401k seamlessly and without delay.
Why Real Estate?
Real estate is the most popular alternative asset investment for retirement account holders.
Ever since the advent of Solo 401k plans, the IRS rules have always permitted you to engage in almost any type of real estate investment, generally aside from investments involving a disqualified person.
Retirement investors are attracted to real estate as an investment for several reasons, including:
- Real estate has a high tangible asset value
- An investment in real estate can diversify your retirement portfolio
- Real estate is a hard asset and is perceived to be a hedge against inflation
The advantage of using retirement funds to make real estate purchases is that all the income and gains generated by the real estate investment would not be subject to any tax or penalty. Instead of paying tax on the returns of a real estate investment, tax is paid at a later date, leaving the real estate investment to grow unhindered. Generally, solo 401k real estate investments are made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.
Why Use a Solo 401k to Invest in Real Estate?
Unfortunately, none of the major financial institutions will allow you to use 401(k) plan funds to invest in real estate or essentially anything outside of Wall Street. The reason for this is simple: banks do not make money when you buy real estate or gold. They make money when you buy stock, mutual funds, and other financial products they market. As a result, a large number of individuals are turning to a Self-Directed Solo 401k plans to purchase real estate.
What is the Pocket Real Estate 401k?
IRA Financial’s Pocket Real Estate 401k, also known as a self-directed real estate solo401k with checkbook control is an IRS approved structure that allows one to use his or her retirement funds to make real estate and other investments tax-free and without custodian consent. As trustee of the pocket real estate 401k (Solo 401(k) Plan), you will have direct control over the plan assets to make the investments you understand – not just investments forced upon you by Wall Street.
How it Works:
- Establish the self-directed Solo 401(k) Plan with IRA Financial Trust & Capital One online though our mobile app
- Your 401(k) cash/assets can be rolled over to IRA Financial Trust tax-free directly from our mobile app
- The assets will be transferred to a new Solo 401(k) plan checking account with Capital One Bank. Your assigned specialists will help you open a Solo 401(k) plan account with Capital One seamlessly and with no wiring fees or minimum balance requirement. Now you can establish a Solo 401(k) with checkbook control and not visit a bank or deal with bank opening documentation. Our special partnership with Capital One Bank makes IRA Financial the only self-directed provider that can open a Solo 401(k) plan bank account for our clients. This makes the process quick, easy, and cost-effective. As manager of the LLC, you will open a bank account for the LLC at any local bank. IRA Financial will draft an LLC Operating Agreement identifying you as manager of the LLC and the 401(k) as the sole member.
- As trustee of the solo 401(k), you will have 100% checkbook control over all the assets/funds in the solo 401(k) plan to make the real estate investment.
Solo 401k Plan Advantages
- Created by the IRS specifically for the self-employed or small business owner with no full-time employees
- Help build your retirement nest egg by contributing up to $56,000 per year ($62,000 if over the age of 50) – almost 10 times the maximum contribution amount of a 401(k).
- Contribute to your plan using pre-tax, Roth, after-tax funds.
- Borrow up to $50,000 tax and penalty-free and use those funds for any purpose, whether personal or business
- Invest in what you know and understand without tax, such as real estate, precious metals, tax liens, hard money loans, private businesses, and much more.
- As trustee of the plan, making an investment is as easy as writing a check or executing a wire transfer.
- Generate tax-deferred or tax-free income or gains on your plan investments
- Open your self-directed Solo 401(k) plan at any local bank – no need for a special custodian
- Asset & creditor protection
- Purchase real estate with leverage without triggering tax
- Receive an IRS opinion letter confirming the legality of the plan
Unrelated Business Taxable Income
Most retirement account investments that generate passive income will not be subject to Unrelated Business Taxable Income (UBTI or UBIT) or Unrelated Debt Finance Income (UDFI) Tax.
The UBTI tax is only triggered if:
- Retirement account uses margin to buy stock
- Retirement account invests in an active business through a passthrough entity, such as an LLC
UBTI/UDFI Exemption for Using Leverage to Buy Real Estate
When a 401(k) plan invests in real estate without the use of leverage, the income and gains generated are typically tax deferred. However, when an 401(k) uses a non-recourse loan to acquire real estate, the income and gains attributable to the investment may be subject to the Unrelated Business Taxable Income (UBTI) tax or Unrelated Debt Financed Income Tax (UDFI). The UBTI tax would apply to a percentage of the income or gains generated from the investment that is attributable to the non-recourse loan.
However, Internal Revenue Code Section 514(c)(9) was enacted in 1980 for the purpose of exempting qualified pension plans, such as 401k plans, from the application of the UBTI tax for real estate transactions involving acquisition indebtedness. This exception under IRC 514(c)(9) for 401k plan participants seeking to use non-recourse leverage for “the purpose of acquiring or improving real property” is significant, as it allows them to use leverage for real estate transactions in a manner that can potentially boost their retirement account returns in a very tax-efficient manner.
The UBTI & UDFI Trigger the Same Tax Rate
The UBTI and UDFI trigger the same tax rate, which is a maximum of 37% for 2019. Therefore, if you plan to make real estate investments using a pocket real estate 401k Plan and the underlying investment will not involve an investment into a business operated via a passthrough entity, such as an LLC, has debt or margin, the UBTI tax rules will likely not be triggered.
Your Financial assigned specialists will help you understand the potential application of the UBTI/UDFI tax rules and potentially reduce or eliminate it.
Act Quickly on Investments
With a Pocket Real Estate 401k , you will have the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your 401(k) funds, as manager of the Checkbook 401(k) simply write a check or wire the funds straight from your Solo 401(k) plan bank account. The Pocket Real Estate 401(k) allows you to invest in what you know and understand, such as real estate and act quickly when the right investment opportunity presents itself. In addition, with the Pocket Real Estate 401(k) structure, all income and gains from 401(k) investments will generally flow back to your solo 401(k) plan tax-free tax-deferred or tax-free in the case of a Roth solo 401(k) plan.
2019 Most Popular Real Estate Investments
The following real estate investments have been popular with our self-directed solo 401(k) clients in 2019:
- Residential homes – for sale and flip
- Vacation homes for rental
- Raw land
- Joint venture investments involving commercial properties
- Mortgage notes