by Dmitriy Fomichenko
Solo 401k Expert
Sense Financial Services LLC
“Buy land. They’re not making it anymore.” ~ Mark Twain
Did you ever imagine being a ranch owner? Wouldn’t it be nice to spend your retirement peacefully on your own piece of land?
If you already own a ranch, all of these possibilities are real but if you’re living in a city with a job that requires your presence every day of the week, this could be a distant dream. Further, if you’re a first-time homeowner, buying rural land in addition to your current mortgage payments could be a challenge. According to the data provided by the Federal Housing Authority, $190,000 was the average size of an FHA mortgage in the US in 2016.
How would you like to purchase rural land with your retirement plan?
Sounds uncommon, right!
The good news is that the IRS allows purchase of real estate through qualified retirement plans. However, it doesn’t require retirement plan providers to offer real estate as an investment option mandatorily.
Let’s take a look at the most popular retirement plans allowing real estate investments:
- Self-directed Solo 401k plan
- Self-directed IRA
What is a self-directed Solo 401k retirement plan?
Self-directed Solo 401k retirement plans are targeted towards self-employed professionals and owner-only businesses. The two requirements of opening a Solo 401k retirement plan include the presence of self-employment activity and absence of full-time employees.
- Annual contributions: up to $60,000 in 2017 (inclusive of catch-up contributions of up to $6,000)
- Investment options: real estate, precious metals, private equity, personal lending, mortgage notes, tax liens, tax deeds, and regular stock/bond investments
- Features: participant loan, checkbook control, investment discretion, Roth contributions, and UBIT exempt on leveraged real estate
What is a self-directed IRA?
A self-directed IRA is a regular retirement savings plan with the option to choose your investments. It comes with a wide range of investment options, allowing you to add alternative investments to your portfolio.
- Annual contributions: up to $6,500 in 2017
- Investment options: private business, real estate, private lending, tax liens/deeds, precious metals, and stock/bonds/mutual funds.
- Features: alternative investment options, investment discretion (requires custodian consent)
Step-by-step process to purchase rural land with your self-directed retirement plan
- Open a self-directed retirement account: Start by opening a self-directed retirement account, and fund it with qualified rollovers or regular contributions.
- Choose a rural land for investment: Much like any other investment, choose a rural land that qualifies your investment criteria.
- Use of non-recourse financing: If you run short on funds, make sure to use non-recourse financing The IRS allows the use of non-recourse financing. Further, the usage of such financing keeps the creditor’s claim limited to the collateral, rural land in this case, only.
- Title of the property: The key is to hold the title in your self-directed retirement plan’s name. You will sign on behalf of your plan as the plan trustee.
- Maintenance of the land: Any maintenance cost associated with the land must be paid directly from the plan. In addition to it, any income generated by the property will go directly to the plan itself.
3 Things to know when using retirement money for real estate investing
- Prohibited transactions and disqualified personnel: The IRS defines prohibited transaction as ‘any improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person.’ Make sure that you do not involve disqualified person in any of your deals.
- Use of retirement income for personal gain: It is prohibited to use retirement income for your personal gain. The same rule stands for the use of any property held within the plan. Any income generated by the property belongs to your retirement plan only, and similarly, any expense incurred on the property comes from the plan alone.
- Non-recourse financing: Only use non-recourse financing for the purchase of the land. The IRS prohibits the use of personal funds for the purchase or maintenance of the property.
When you retire you are allowed to take the entire property out of your retirement account as “in-kind distribution”. At that point it becomes your personal property and you can now start using it for your personal benefits and enjoyment.
Buying rural land is a sound investment strategy in itself. The key is to understand the ins and outs of the investment, and when in doubt, consult a professional.
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