I’m interested in real estate, but I can’t move my 401(k) to a self-directed IRA because I’m still employed with the company. What is the next best way to fund my account? Should I simply wait until I can move the funds? Should I wait until I can consolidate all my retirement funds to one location? Is there another way to fund investments even if I can’t move over all my money?
Thank you for your question, Rob. Procuring funding for your future investment is often the primary concern for investors considering a self-directed IRA. Moving 401(k) money to a new self-directed IRA is an option that many will opt for, but it’s certainly not the only way to fund your IRA or the investments therein. Of course you can transfer or roll over funds from other IRAs as well, but if this option isn’t available, you may want to explore other avenues for funding.
First and foremost, you can contribute directly to your plan out-of-pocket up to the IRS limit. Here, at Equity Trust, the minimum contribution amount is $500.
One often overlooked funding method is the possibility of partnering. You can partner your IRA with someone else’s IRA or personal funds, or with your own personal finances. Partnering isn’t a license for comingling or unqualified distributions. You have to make certain that the investment is titled and funded according to what is called “undivided interest”. This means that if you chose 50%, for example, as the amount your IRA would own for an investment and 50% for what your personal finances would own, then all profits, costs, and initial investment money would flow according to this percentage. There are other details and benefits to consider when weighing this option but it’s certainly worth considering, especially if you have an investment in mind but don’t have complete funding available at the time of purchase.
Another method to fund investments when you’re not yet able to free up your 401(k) cash is a non-recourse loan. A non-recourse loan is a special type of loan that does not use the rest of your IRA as collateral. This is the only type of loan your IRA can receive because the funds in your retirement account cannot be used as collateral. While I’ve heard numerous success stories regarding the use of non-recourse loans, they do have a number of possible complications that come with them. For example, you can potentially trigger UBIT, or Unrelated Business Income Tax. You also may potentially pay a higher interest on the loan than you may expect from a regular bank loan. Before pursuing this avenue, but make sure you’ve thoroughly researched the lender first and educated yourself completely. As always, speak with your financial professional or tax advisor for advice relating to your specific situation.
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