Though real estate investing has historically ebbed and flowed with respect to popularity, today many are trying to get in on the action.
With the desire to invest in hard assets comes the pesky requirement to have money available to invest. That typically comes from personally available liquid assets. For some, that pool of money is not limitless, and you must seek other options.
One source is your retirement account. However, not all benefit plans allow for investment in “alternative” assets such as real estate.
A very brief history lesson:
In 1875, the American Express Company created the first private pension plan. This provided lifetime income for loyal employees after they retired. By 1970, 45% of all private workers were covered by a private defined benefit plan.
Employees traditionally had little to no control over their retirement investments. That was handled by the pension administrators. However, they had enough money to enjoy their “golden years.”
Likely in response to rising pension obligations, and possibly poor investment management, the Revenue Act of 1978 ushered in the existence of the 401(k) program. This program is a defined contribution plan as opposed to the historical defined benefit program.
This was a massive operational shift in the retirement system. The creation and adoption of the 401(k) shifted financial responsibility from the employers to the employee. It is the 401(k) and other defined contribution plans that dominate the employment landscape today.
No longer can an employee work for twenty or more years for a company and receive a comfortable stipend for the rest of his or her life. The days of the gold watch, drinking tea on the porch, and playing golf every day are becoming a faded memory.
Today, the performance of your money is dependent on your talents or those of your fiduciary. In a typical Qualified Plan, you are offered a narrow choice of investment vehicles, all of which are sponsored by your friends on Wall Street.
That choice is further narrowed depending on which company administers your plan. Most plan administrators only offer certain stocks, mutual fund, ETFs and bonds for investment. Your choices are limited to the handful of securities that they have chosen.
You’re typically not given the opportunity to invest in everything the market has to offer. In addition, the typical 401(k) will not allow you to invest in real estate or precious metals.
Employee sponsored benefit plans have long been a good way to force savings. However, from an investment standpoint, they have shortcomings. What most of us want is a way to grow significant and freedom-producing wealth.
Thankfully, there are other options. These include IRAs, self-directed IRAs and solo 401(k)s, to name a few. These have become popular over the past two decades. These vehicles allow the individual to direct the use of the funds, within specific parameters.
SDIRAs can be used to invest in a variety of investments, including real estate. There are limits and the system is clunky, but it broadens your options. IRAs give you more flexibility and control than you get from a faceless broker in New York.
Limitations of some IRA plans include the inability to use debt if you own the property within your retirement plan. Required minimum distributions can be a problem as you reach age 72. Although the IRA is a tax-favored entity, often you can’t take advantage of depreciation benefits inside your IRA.
A solo 401(k) has different rules and might allow the use of debt and even the purchase of precious metals.
Although there are limitations, solo 401(k)s and self-directed IRAs have provided a true benefit for real estate investors. Should you use your self-directed plan to invest in real estate?
Of course, I don’t give advice, and the answer is always “It depends.” Every investment is different and should be assessed on a case-by-case method.
If you are interested in alternative vehicle for your retirement funds, I suggest you consult with an advisor to find the right fit for you. As always, this is for informational purposes and I encourage you to do your own research.
I recently created a short, 3-minute video on the subject of self-directed plans and real estate investment. I brought along an expert to give you some guidance. It’s not exhaustive, but it gives you some resources to take advantage of.
If that’s something you’re interested in, click the link below.
Click Here for a Video on Investing in Real Estate with Your IRA
Until next time!
Tom
