I know two people right now facing this dilemma. They each have around $150K in their IRAs and are interested in real estate. One is 50 and still working; the other is 65 and retired.
What are your thoughts on flipping within an IRA with no loans involved?
Super question, Doug. Doing flips inside the plan makes a lotta sense. The reason, of course, is that it IS short term, and usually highly profitable. Thing is, doin’ it in a traditional IRA isn’t something I’d recommend, and here’s why.
The 65 year old might very well get a government notice when he hits 70.5 years old, tellin’ him he WILL begin taking more income from his IRA, cuz he’s not taking enough. ‘Course, at 65 he might already be between a rock and a hard place for income. If that’s the case, takin’ the tax hit by converting to a Roth setup wouldn’t be practical. On the other hand, if he had enough in his traditional IRA now, such that the after tax amount would allow him to flip, he’d be in a much better position on a few levels.
1. The income he’d take would be tax free.
2. He wouldn’t face the possibility of being forced to cannibalize his principle at 70.5.
3. He can either continue flipping, makin’ more and more profits, or make the decision to invest in something else for income. Or both. Either way the income is tax free in the Roth.
The 50 year old guy has a better way to go, but that’ll get too involved for the comment section.
I have much more to say on this, but will put it into a more coherent video. Again, great question, Doug.
In this case, the 50 year old has funds in a Roth; the 65 year old has funds in a traditional IRA. The 65 year old already needs to start drawing down funds – and that’s cool, as she secretly fears that the government will one day come after IRAs, and she rather deplete hers by then. ^o^
The 50 year old is more willing to participate in the “sweat equity” aspect of the flip, and she is looking to simply grow the retirement egg with a little safer asset.
Guys, a few comments I will make on some of these posts. Keep in mind one important issue: doing “flips” with a retirement plan is POTENTIALLY doable; however, one must be very careful and seek tax guidance so that their activities does not trigger UBIT (Unrelated Business Income Tax). Is there a solid, in black and white reference…no. But, you need to be cognizant of one thing…will the IRS come back and say that this is an investment of the plan OR are you attempting to run a business. More on this later…but good comments and questions.
That article claims that most types of real estate investment would be exempt…
The reasoning behind the tax (ensuring a non-profit entity would not gain advantage over a profit entity by pricing strategy) seems a little weak for a flipping model. One might argue that nowhere in the sale of a piece of real estate does profit truly come into play in respect to the sales price. IOW, it doesn’t matter if the developer is making a killing or losing his shirt – the property is only worth what someone else in an arm’s length transaction is willing to pay.
Hey Guys — Much of this discussion becomes moot when the Solo 401k is the entity. John Park is the guy to call on that, as he’s the ‘Self-Directed’ plan expert on my team.
Good information here Jeff. I wasn’t aware of some of the issues you raised until I saw this video. Most of the properties I buy with my self-directed IRA don’t involve financing (because I can buy them free and clear)… but I’ll definitely keep this in mind if/when I come across a scenario like this.
Jeff,
I know two people right now facing this dilemma. They each have around $150K in their IRAs and are interested in real estate. One is 50 and still working; the other is 65 and retired.
What are your thoughts on flipping within an IRA with no loans involved?
Super question, Doug. Doing flips inside the plan makes a lotta sense. The reason, of course, is that it IS short term, and usually highly profitable. Thing is, doin’ it in a traditional IRA isn’t something I’d recommend, and here’s why.
The 65 year old might very well get a government notice when he hits 70.5 years old, tellin’ him he WILL begin taking more income from his IRA, cuz he’s not taking enough. ‘Course, at 65 he might already be between a rock and a hard place for income. If that’s the case, takin’ the tax hit by converting to a Roth setup wouldn’t be practical. On the other hand, if he had enough in his traditional IRA now, such that the after tax amount would allow him to flip, he’d be in a much better position on a few levels.
1. The income he’d take would be tax free.
2. He wouldn’t face the possibility of being forced to cannibalize his principle at 70.5.
3. He can either continue flipping, makin’ more and more profits, or make the decision to invest in something else for income. Or both. Either way the income is tax free in the Roth.
The 50 year old guy has a better way to go, but that’ll get too involved for the comment section.
I have much more to say on this, but will put it into a more coherent video. Again, great question, Doug.
In this case, the 50 year old has funds in a Roth; the 65 year old has funds in a traditional IRA. The 65 year old already needs to start drawing down funds – and that’s cool, as she secretly fears that the government will one day come after IRAs, and she rather deplete hers by then. ^o^
The 50 year old is more willing to participate in the “sweat equity” aspect of the flip, and she is looking to simply grow the retirement egg with a little safer asset.
Guys, a few comments I will make on some of these posts. Keep in mind one important issue: doing “flips” with a retirement plan is POTENTIALLY doable; however, one must be very careful and seek tax guidance so that their activities does not trigger UBIT (Unrelated Business Income Tax). Is there a solid, in black and white reference…no. But, you need to be cognizant of one thing…will the IRS come back and say that this is an investment of the plan OR are you attempting to run a business. More on this later…but good comments and questions.
If you use an IRA to flip houses you may be subject to UBIT (Unrelated Business Income Tax).
http://www.broadfinancial.com/ubit
That article claims that most types of real estate investment would be exempt…
The reasoning behind the tax (ensuring a non-profit entity would not gain advantage over a profit entity by pricing strategy) seems a little weak for a flipping model. One might argue that nowhere in the sale of a piece of real estate does profit truly come into play in respect to the sales price. IOW, it doesn’t matter if the developer is making a killing or losing his shirt – the property is only worth what someone else in an arm’s length transaction is willing to pay.
Harlyd, I agree. Good point that you threw out as a reminder to folks.
Hey Guys — Much of this discussion becomes moot when the Solo 401k is the entity. John Park is the guy to call on that, as he’s the ‘Self-Directed’ plan expert on my team.
This is very insightfull Jeff!
Good information here Jeff. I wasn’t aware of some of the issues you raised until I saw this video. Most of the properties I buy with my self-directed IRA don’t involve financing (because I can buy them free and clear)… but I’ll definitely keep this in mind if/when I come across a scenario like this.