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Real Estate Investing and More in your Retirement Accounts

Financial Planning Dentist

Yes, you read that correctly, you can own real estate, land, private businesses, notes, precious metals, livestock, crypto currencies, equipment and more in your retirement accounts. We love telling clients of InSight that there is an investing world beyond what CNBC & Jim Cramer. Your retirement nest egg can be invested in more than stocks and bonds and you don’t have to be uber rich to do it. Anyone and everyone can. Our clients at InSight want to Invest in what they know, are passionate about, and understand, not just what the news or latest article or podcast tells them they should invest in. For many, yesterday, today, and tomorrow’s stock market can be intimidating, frustrating, and quite frankly annoying. 

By Peter Locke CFP® and Kevin T. Taylor AIF®

Now, while doing this on your own is possible, there are a lot of ways to screw up and disqualify an investment opportunity by not knowing the rules so we recommend you use a third party professional before you do this.

10 Mistakes SDIRALet’s shed some light on what the clients at InSight are talking about and investing in. Over the past decade, I worked for a large brokerage firm. I wasn’t given the tools to help clients with self-directed IRAs. Unfortunately, I couldn’t even refer them to a third party that could. Advisors at these large firms like the one I used to work at aren’t given the opportunity or even allowed to refer clients to do something they want to do because it wasn’t in the best interest of the firm. What I mean by this is that if your expertise is in residential real estate and your financial advisor is only pitching you to sell your properties and invest in their diversified stock and bond portfolio then are they acting in your best interest? Sure, maybe all your net worth is in real estate and diversifying into non-correlated assets is a good idea. In that case, yes. However, this is not the case I am referring to. 

I am referring to the case where you know real estate and you want to use the funds you’ve saved in your retirement accounts to buy an investment property or a business that you heard about (key word here is investment not personal). Your advisor will most likely sell you on why you shouldn’t and that you should invest in stocks and bonds instead. Or they will tell you that you can’t depreciate an asset that’s in an IRA and therefore not great for tax incentives, or that it’s too expensive. And they’re right about depreciation but wrong about the tax incentives. If you buy a property in an IRA and the rent pays for your mortgage, the income just like a dividend isn’t taxable when it’s inside the IRA, and neither is the sale when you want to get into something else. When you turn 59.5 you can take that rental income which would be ordinary income inside an IRA or 401(k) but if you bought it in a Roth, then it’s tax free. That advisor doesn’t want you to invest in a property because that means no compensation for them.

At InSight, a core part of our business is enabling our clients to use the tools at their disposal to get to where they want to go. We help our clients make these types of investments a reality. We’re only fiduciaries when we’re using everything that is available to us and is in the best interest of the client. If a client has a high required rate of return, but hates the day to day fluctuations in the stock market, then riskier investing isn’t appropriate. This would be a case where we’d look at alternative investments and find another way to capture that rate of return required to get them to that goal. A client’s home and 401k are typically their two largest investments. But if your 401k is 4x your home value, then spreading your investments out into things you feel more comfortable with and gives you capital appreciation and income then real estate may be an option for you. If interest rates are low, then real estate is probably an even better option. 

As I stated before, you can easily mess this up and therefore you need to make sure you surround yourself like we always do with the right People, Processes, and Policies to hold you accountable. Be sure to read the Rules of Self-Directed IRAs and make sure it fits in your InSight-Full® plan. 

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The three takeaways in this article: What you can expect regarding the Increase Capital Gains Rate How Estate Planning & Gifting will change next year How to use Tax Credits for parents and children While I was out to lunch with Sue, a small business owner in the Event Planning space, she asked me about Biden’s proposed tax increases and if she should be doing anything about it. Given that Sue is nearing retirement and her business is very profitable it was important to discuss how the proposed budget would impact her and the business.   Sue was hoping to work for 3-5 more years and then sell her business when she reaches 65 for Medicare purposes. While this is very much still an option, Sue and I decided to review her situation in more detail so she could make the most educated decision moving forward. Since selling a business and retiring is a massive decision in itself, if the new proposed tax law changes would help make her decision easier then it was my job to let her know.  The Capital Gains Rate is expected to increase from 20% to 39.6% on income in excess of $1 million Proposal: Increase the top capital gains rate (raising the capital gains tax is an alternative to raising the estate tax exemption) currently at 20% to 39.6% before application of the 3.8% net investment income tax for income in excess of $1 million (possibly retroactively – Yes, this can be done due to Article I, Section 9 of the United States Constitution) Ex: In 1993, the top ordinary income tax rate was increased on both ordinary income as well as the estate and gift tax retroactively to the beginning of the year (even though it was enacted in August).  What can Sue do: It may be worthwhile to accelerate the sale of her company in order to capture gains at today’s current top capital gain tax rate. 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Using an Improvement Exchange

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