How to Use a Self-Directed IRA or 401(k) to Invest in Real Estate

In 2021, Steve and I took a bold step to secure our future. We cashed out all our stock market investments. I mean EVERYTHING. Personal holdings, IRAs, 401K…. the entire portfolio was liquidated.

Why did we do this?

We were convinced that the risk vs return relationship was out of balance. It is a common saying that the greater the risk, the greater the potential reward. Or that is what is supposed to happen. But our stock returns were lacking luster, and the continued growth seemed unsustainable.

To us that was too much risk for the reward. Especially when compared to our real estate holdings, where we earn double-digit returns. These returns were outpacing inflation and anchored in solid assets. Assets that we could drive by a SEE, they were not some overstated number in a computer.

We decided to take control of our portfolio and invest it all in Real Assets. These assets are tangible, managed by real people, and located on Main Street, not Wall Street. Real estate, gold, businesses, oil, and debt notes are some examples of what we bought.

Since then, we have achieved better than average returns, protected our cash from inflation, and have stopped worrying about the future of our investments.

Many of you have heard our story, and upon hearing it have asked: “But Tracy, how did you invest outside of Wall Street with your retirement funds?”

I decided it was time to break down the available plan structures to help further your understanding. This, after all, is the second most powerful investment strategy that Steve and I use to grow wealth. The first being Private Partnerships/Syndications (explained HERE). We stand strong in our commitment to help others grow their financial wellbeing, and this is a great method.

I am not a CPA or your financial advisor. I will take you through the basics of what I know, and then it is up to you. Take this newsletter as a starting point, and if the prospect of moving your retirement funds out of Wall Street and into Main Street appeals to you, contact me, and I will give you additional resources to further your education and refer people who can get you started. It is actually a relatively simple and painless process.

It is possible to invest in alternatives to stocks and bonds but you will need to convert your current plan or start a self-directed account. A self-directed account will allow you to invest in a large selection of assets including real estate, gold, oil, crypto currency etc. However, there are rules that must be strictly followed. See a list HERE.
I know of two types of Self Directed accounts: a Self-Directed IRA or a Self-Directed 401K.
Here are the major differences:
1. Eligibility
- Self-Directed IRA:
  - General Availability: Available to any individual with earned income.
  - Roth and Traditional Options: Can be set up as either a Traditional IRA (tax-deductible contributions, tax-deferred growth) or a Roth IRA (post-tax contributions, tax-free growth).
- Self-Directed 401(k):
  - Business Requirement: Primarily designed for self-employed individuals or small business owners with no full-time employees other than the owner(s) and their spouse(s). This requirement can be satisfied many different ways even for W2 wage earners.
  - Solo 401(k): Commonly referred to as a Solo 401(k) or Individual 401(k), targeting sole proprietors, partners, or corporations.
2. Contribution Limits
- Self-Directed IRA:
  - Annual Contribution Limit: $6,500 for individuals under 50, and $7,500 for those 50 and older (for 2024).
  - Catch-Up Contributions: Additional contributions allowed for those 50 and older.
- Self-Directed 401(k):
  - Higher Contribution Limits: Significantly higher limits compared to IRAs. For 2024, the maximum contribution is $22,500, with an additional $7,500 catch-up contribution for those 50 and older.
  - Employer Contributions: Allows employer contributions (YOU can act as the employer), bringing the total limit to $66,000 ($73,500 for those 50 and older) or 25% of compensation, whichever is lower.
3. Investment Options
- Both:
  - Wide Range of Investments: Both types allow investments in real estate, private equity, precious metals, cryptocurrencies, commodities, tax liens, and more.
4. Loan Provisions
- Self-Directed IRA:
  - No Loans Allowed: IRAs do not permit borrowing against the account balance.
- Self-Directed 401(k):
  - Loan Options: Allows participants to borrow up to 50% of the account balance or $50,000, whichever is less, with specific repayment terms.
5. Administrative Requirements
- Self-Directed IRA:
  - Custodian Required: Must be held by a qualified custodian or trustee who handles the administrative tasks and ensures compliance with IRS regulations.
  - Annual Reporting: Custodian reports the value of the IRA to the IRS annually.
- Self-Directed 401(k):
  - Custodian Not Required: Typically does not require a custodian, allowing for more direct control. But you are responsible for the reporting too.
6. Costs
- Self-Directed IRA:
  - Custodian Fees: Typically involves custodian fees, which can vary based on the custodian and the complexity of investments.
- Self-Directed 401(k):
  - Setup and Administration Costs: May have higher initial setup and ongoing administrative costs, especially if hiring a third-party administrator (TPA).

If you have a desire for more control, better diversification and potentially higher returns with your retirement funds then consider a self-directed account.

As always we are here to help you achieve more wealth with less work. Give us a call or consider joining our investment club the StoneCrest Partners Alliance where you will be the first to know about upcoming opportunities, get invited for exclusive site visits and receive even more in depth knowledge on syndications