Buyers have a source of
investment capital that they
haven't considered -- their
pensions.
Many people don't know
that they can use their pension
funds to invest in real estate.
The truth is it's entirely
possible and perfectly legal --
with a self-directed pension
plan.
Any time a pension fund
allows someone to control his or
her own investment decisions
it's a self-directed plan. But
the term "self-directed" can be
misleading, especially when you
are limited to investing in a
list of stocks or mutual funds
provided by your plan's
administrator. If you have a
truly self-directed plan, you
can invest in just about
anything you want, as long as it
fits within IRS guidelines.
So many things are
included in the IRS guidelines
that even the IRS doesn't bother
trying to list them all. Instead
the IRS lists only those things
pension plans can't invest in.
If it's not on that list, then
you should be okay making the
investment, so long as the
transaction isn't barred under
the "prohibited" transaction
rules or the "disqualified
persons" rule.
Prohibited transactions
include:
The sale, exchange or lease
of any property between a plan
and a disqualified person
Furnishing goods, services
or facilities between a plan and
a disqualified person
Using any portion of the IRA
as security for a loan by a
disqualified person, and
Use of income or assets of a
plan by a disqualified person
for his or her own benefit
Disqualified persons are
the plan owner, the plan
administrator, and the plan
owner's lineal family members
(i.e., children, grandchildren,
parents, grandparents, etc.).
Other relatives, like brothers,
sisters, aunts and uncles are
not considered disqualified
under IRS guidelines.
Until recently there
wasn't a lot of choice in truly
self-directed plans: you either
had some type of tax-deferred
IRA (regular, SEP, Spousal,
etc.) or a tax-free Roth IRA.
Both serve a great purpose, but
there are income and
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contribution limitations,
especially for Roth IRAs, and
many high-end clients may have
been prevented from contributing
to a Roth IRA altogether.
A couple of years ago,
though, the government widened
the playing field by introducing
a special "solo 401(k) plan,"
which was designed for sole
proprietors and single-person
businesses. And this year the
pension plan field was blown
wide open with the creation of
something called a Solo Roth
401(k). This plan combines the
tax-free features of a Roth IRA
with certain tax benefits of a
regular 401(k) plan, with a
couple of key differences,
namely there are no income
limitations and the contribution
amounts are much higher. Up
until now a couple has been able
to contribute a maximum of
$8,000 per year into an IRA or a
Roth IRA; with the new Solo
401(k) and Solo Roth 401(k)
plans that contribution limit
goes up to a whopping $88,000
for couples, or $98,000 for
couples over age 55. To qualify
to open one of these solo plans,
you must own your own business,
have no employees working more
than 1,000 hours per year, and
must be receiving W-2 or 1099
income (so clients receiving
only passive income from an LLC
would not be able to qualify).
If you don't have enough
money to buy real estate
outright with pension funds,
don't worry. You can combine one
or more smaller funds together
to make a single purchase, or
you could approach one of a
growing number of mortgage
brokers and financial
institutions that offer loans to
self-directed pensions. This is
a particularly effective
strategy to use with the Solo
401(k) plans, as these plans
don't require you to pay tax on
the earnings that are derived
from loans to the pension plan.
There are estimates that
say there is approximately a
trillion dollars sitting in
pension plans in America.
Imagine what that money could do
in the real estate market. So if
you are looking for new sources
of capital to expand your real
estate portfolio, get familiar
with the basics of pension fund
investing.
Remember to consult
with your professional financial
advisor before making decisions. |
