Investing IRA 401 (k) in Stocks vs. Real Estate

If you have a 401 (k) and can self direct your retirement investment this is a must read!!!

Basic Information on Individual Retirement Accounts (IRA 401 k)

Individual Retirement Accounts (IRA 401 k) allows an employee to put funds aside for their retirement. These savings can be invested without accruing current income taxes until the money is withdrawn. 401 (k) plans are usually a retirement benefit from an employer, who can opt to match the employee’s input or offer a profit sharing contribution option. Often the employee can choose from numerous investment options (e.g. bonds, market investments, stocks) or choose to purchase their own company’s stock. These options are referred to as participant-directed plans and are frequently chosen. When an employee leaves the company, their 401 (k) leaves with them and stays active until they either A) retire or B) reach the age of 70 ½ and then by April 1 of that calendar year withdrawals must be made. A self-directed 401 (k) applies to those who have left a company and have the active account, own a small business or have sole proprietorship. After the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), self-directed 40l (k)’s can invest in real estate, private companies, tax liens, any nearly any other form of investment.

The Benefits of Investing in Real Estate vs. Stocks

It blows me away the millions of IRAs lodged in the stock market. I’ve spoken with many of my clients and informed them how self-directed IRA’s work and have urged them all to invest in real estate. Why? Simply, over the years and across the board real estate will outperform stocks. There are many misconceptions as to what self-directed IRA’s are capable of. For instance, did you know you can buy an investment property using your IRA contributions as the down payment and obtain a loan for the balance? While most self-directed custodians accommodate traditional investments such as mutual funds and stocks, specialized companies allow clients to invest in all forms of real estate (e.g., raw land, rental properties; commercial properties; real estate related private entities, such as limited liability companies, that invest in real estate). For example, you could direct $100K out of your current stocks that are not earning any return on the investment and purchase a condo or small house with no or little debt. In my opinion, buying an entry level house, especially during these economic times, is a better investment than leaving your money stale in the stock market. Get more details from www.IRS.gov and search for publication 590. On pages 44-49, you will find specifics of what you can and can not do with an IRA 401 (k). Or you can call or email me and I will do my best to answer your questions with no cost or obligation.

Investment Property Tax Strategy

Today’s incredible buying market is open for investors looking to capitalize on current conditions In the late nineties up to 2005 the huge margin between what investors were paying for the property and the rent they were receiving made it close to impossible to receive a positive cash flow. Investors inevitably had to pay up to 40-50% cash down in order to make a profit on their investment. Many investors chose to back down and look for alternatives. For thirty years I have sold investment properties from single family dwellings to large apartment complexes, many with negative cash flows, or as they say, that fed the alligator. During this ten year period my investor’s clients purchased for two reasons. The first was hope for appreciation and the second reason was for tax incentives.

With my professional history and familiarity of the investment process, I am a firm believer that negative cash flow without strategic tax tactics is a lose/lose situation. That said, there are methods available that if calculated correctly with a professional tax advisor you can reap the benefits of a profitable investment venture. For example, begin by setting up your investment property with the right tax strategy prior to close of escrow. IRS will allow you to accelerate the depreciation in such a matter to take advantage of off-setting other income until hopefully appreciation together with income increases kick in. While IRS has done away with some of the tax depreciation acceleration methods, some do still remain. I am not a CPA or tax advisor and am not here to give tax advice, but merely raising questions you should be asking your tax advisor and options that are available to you.

This leads me to the current market condition and purchasing investment properties. Sale prices are down; rental rates are down, but not at the same percentage as sales prices. This means the income to debt ratio is better than I’ve seen in over seven years making the probability of an investment with positive cash flows sky rocket. If you’ve thought of investing in real estate, all things considered, now is the time. Now I don’t say that lightly as I know better than most the erratic roller coaster the real estate market can be. I know this business and I can tell you there are now cash flow deals with 20% down or less. Call or email me if you would like to talk shop with no cost or obligation about possible investments you’re considering.