How to invest in real estate wifth your IRA and 401 (k) and pay little or no taxes: turn your retirement accounts into wealth-building machines! PDF
Preview How to invest in real estate wifth your IRA and 401 (k) and pay little or no taxes: turn your retirement accounts into wealth-building machines!
How to Invest in Real Estate with Your IRA and 401(k) and Pay Little or No Taxes This page intentionally left blank How to Invest in Real Estate with Your IRA and 401(k) and Pay Little or No Taxes Turn Your Retirement Accounts into Wealth-Building Machines! Hubert Bromma McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2007 by Hubert Bromma. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or dis- tributed in any form or by any means, or stored in a database or retrieval system, without the prior written permis- sion of the publisher. 0-07-150843-0 The material in this eBook also appears in the print version of this title: 0-07-147167-7. All trademarks are trademarks of their respective owners. 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We hope you enjoy this McGraw-Hill eBook! If you’d like more information about this book, its author, or related books and websites, please click here. For more information about this title, click here Contents Preface vii 1 Getting Started 1 2 Selecting a Self-Directed Retirement Plan 17 3 The Reicher Family Explores Its Contribution Limits 33 4 Buying and Selling Real Estate 51 5 Positive Cash Flow and Appreciation 65 6 Borrowing Money 79 7 Getting into the Lending Business 95 8 Asset Protection 107 9 Prohibited Transactions 113 10 Taking Distributions 129 Appendix: Section 4975, Tax on Prohibited Transactions 143 Glossary 171 Index 195 v This page intentionally left blank Preface Investing in real estate as a means of acquiring wealth has been popular since the beginning of recorded history; however, many savvy investors are not aware that they can use their retirement plans to invest in real estate. Many people feel “trapped” in their stock market investments owing to common misconceptions about the types of investments that are permitted within individual retirement accounts (IRAs) and other retirement plans. The widespread misconception that permissible IRA investments are limited to stocks, bonds, mutual funds, and certificates of deposits is the result of peo- ple and companies who are in the business of selling these products. The Internal Revenue Service (IRS) requires that you have an approved custodian for your IRA or other retirement plan. For the vast majority of investors, the custodian is a bank, brokerage firm, or mutual-fund company—the very companies that are in the business of selling investment products. These custodians simply choose to limit your IRA investment choices to the products they sell. These limits are not imposed by the IRS. In fact, the only investment types that are prohibited by the IRS rules are life insurance and collectibles, such as artwork and antiques. The IRS rules allow you to invest your retirement funds in real estate, lend your IRA as a mortgage loan, and many other investment alternatives. The key is to have a custodian that is will- ing to allow you to self-direct your retirement plans, thereby expanding your investment choices and allowing you to freely choose how to direct your portfolio. Since 1975, you could use Keogh plans (now called qualified plans) to pur- chase real estate, offering tax-deferred investment opportunities. Since then, IRAs vii Copyright © 2007 by Hubert Bromma. Click here for terms of use. viii HOWTOINVESTINREALESTATEWITHYOURIRAAND401(K)ANDPAYLITTLEORNOTAXES have become popular because the contribution limits for simplified employee pension plans have increased. In 1997, Roth IRAs made tax-free investments phe- nomenally popular. And most recently, in 2006, Roth 401(k)s, which have no salary caps for deferrals, expand your options in investing. If your current plan doesn’t allow you to take advantage of the broad investment possibilities, don’t worry. You can easily transfer any non-self-directed IRA to a self-directed one or amend and restate an existing qualified plan to one that permits self-direction. Whether you currently have retirement funds or are considering the benefits of setting funds aside specifically for retirement purposes, this book helps you assess which options are best for you. The methodology is straightforward and similar to performing a real estate transaction with nonretirement funds. Real examples give you a glimpse of the common types of transactions you can perform and creative ways to partner with your funds, as well as things to avoid. You’ll also journey through the different kinds of retirement arrangements that are available and how to open and fund self-directed accounts. By understanding the mechanics, you will make sound real estate transactions and mitigate the tax consequences. When you direct your IRA and 401(k) to invest in real estate, it is important to ensure that you do not lose the tax advantages available because of violation of the IRS Code, so we’ve included material to assist you in making the right decisions. As with any investment, there are pros and cons, depending on your personal circumstances and goals. For more than 30 years, the advantage of tax-deferred investing has been available to everyone who earns income. As self-directed plans become more popular and the tax laws become more sophisticated, the wise investor measures each situation carefully to see whether it’s the right approach. In that regard, I strongly suggest that you use a local professional familiar with the investments you make, along with your professional team of administrators, advi- sors, attorneys, financial planners, and accountants, to help you to make the best decisions.
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