There are trillions of dollars sitting in retirement accounts.  Some are invested in stocks and some are just sitting there, not being put to work.  Did you know that you may be able to tap into this lazy money to make it work harder for you by passively investing in apartments or alternative investments?  Should you put this money to work for you at all?

After having many conversations with investors on this topic, I have decided to write about my experience with some decision points for you to evaluate whether it makes sense for you to invest in real estate with your retirement fund.  This is going to be a three-part article released over the course of three weeks. Included are the following topics: 

1. Should you invest in real estate with retirement funds?

2. Types of alternative retirement funds

3. Expectations and tax implications for investing passively or non-traditionally

If you just quit your last job, instead of doing a rollover, read on to see if other retirement vehicles make sense to you and are in line with the vision you have for your future.

Using a Retirement Fund for Your Own Projects

I have met people over the years who tell me that they have an alternative retirement plan (Solo 401K or Self Directed IRA) that they use for their active, single family home fix-and-flip projects.  The alarm goes off for me immediately when I hear this.  

I, for one, do not believe that I can ever pull a fast one on the Internal Revenue Service, EVER. I don’t tiptoe on the edge of IRS requirements or take any chances.  If you are thinking about freeing your IRA or 401K money up to invest in a fix-and-flip home or purchase your own property, it can be done...with organization, discipline and straight, clean books.  I always recommend that you talk to your CPA about these scenarios before proceeding.

The common rule, regardless of using alternative IRA or 401K money to invest in any project, is that it has to be an “arms length” transaction.  You could own properties or even fix-and-flips using these alternative plans.  However, you also have to prove it was an “arms length” transaction, without a doubt, if you are ever audited by the IRS.  The chances of an audit are higher when you have these accounts.  You will have to hire a property manager, general contractor and likely a bookkeeper to make sure everything you do is truly “passive”.  If you ever mixed your accounts with your alternative retirement account, you are likely going to get caught by the IRS.  The penalty is steep.  

The question remains: Should you invest your retirement fund in a project you are directly involved in?   My humble opinion is NO.  This is because I personally can’t keep my receipts straight.  What if I was at the store and, at check out, I accidentally used my personal credit card to pay for a business project or vice versa?  What if I accidentally bought my daughter a lollipop at Home Depot using my Solo 401K credit card?

I am sure at this point some folks will challenge me by telling me the story of them using it to buy fix-and-flip investments directly with their retirement accounts.  I think it’s great if you can keep your transaction at “arms length” with self-discipline, but I have more things to worry about than trying to focus my energy on trying to keep all the little things straight. 

Good Arms Length Transactions for Investing

I do think a retirement account is a wonderful source of money to use for arms length transactions.  Here are a few strategies that could be a perfect fit for your situation and needs.

1. Turnkey properties where you’ve hired a third party to acquire and manage: 

   These include single family homes, small duplexes, triplexes and four-plexes. The turnkey company will provide all services for you in terms of managing, rehab and even selling the property down the road so that the entire transaction is considered “arms length.”

2. Passive investments in apartment syndications or other real estate syndications:

   “Syndication” is a term used to describe pooling money together to accomplish a goal, usually in property acquisition.  There are projects where syndicators pool their investors’ money together and purchase, operate and sell/refinance to produce a return to their investors.  This is all done without the investors putting in any time or energy otherwise.  Thus, coining the term “passive investor.”  Syndications can be for apartment buildings, mobile home parks, storage units, senior housing and other assets. 

3. Note funds: 

   These are funds put together by fund managers to acquire notes either on single family homes or other assets.  These typically yield a decent return but are considered debt and are typically taxed at an ordinary income rate if you were to invest with cash. 

4. Hard money lending: 

   Direct lending for projects typically with a high interest rate. 

5. Other Types of Funds:

   There are many funds out there that may be options for investing.  There are funds that focus on business acquisitions, blended assets, ATM machines, commodities, or Airbnb operations, to name a few. 

6. Precious metals: 

   Silver and gold are the most common, but all types of metal may be a direct trading investment.  

All of your Eggs in One Basket

Before we get ahead of ourselves, I want to circle back to the question “Should I invest in Real Estate with my retirement fund?”

If you are heavily invested in one type of real estate asset, your retirement fund is essentially an all-in-one place for funding an investment.  This goes against the idea of diversification because all of your “eggs” are in one “basket.”  This situation may increase the inherent risk to your portfolio.  However, I have a different philosophy regarding diversification.  I think taking calculated risks helps you double down to maximize the profit.  If you don’t wish to travel this road, you should probably diversify.  Yet, this topic is for another article. 

If you are passively investing, you should try to understand the business or structure on a basic level before handing over your money.  It gets tricky though, especially with alternative investments.  Often with these investments, you are meeting a syndicator or fund manager.  How do you know if you are investing with the right individual and in the right project?  I encourage people to vet any potential syndication team.  Find out all you can about their track record and individual projects before investing.  

We have an online workshop coming up soon to help passive investors increase their practical knowledge and take care of all their investment vehicles before jumping into a passive investment. Click here to get on our waiting list.

For most people, all their life savings is in the stock market or worse, their company’s stock option that defaults them to the company 401K.  Now, you may understand your company very well, but do you understand all the companies your money is invested in?  If you do, you need to keep your money in the stock market as you are an expert in this field. If you do not, perhaps it is time to diversify and increase your portfolio with a few other assets such as real estate, notes or precious metals. 

With my portfolio, I invest in Note Funds, Vanguard Index Funds (I am really bad at picking individual stocks), with the majority of my investment in passive Apartment Syndication deals.  I invest heavily in apartment assets both with my cash and retirement funds because this is what I live and breathe.  This is my passion and I have a wealth of knowledge on this topic.  When I invest in something that I understand, I feel my money is more secure. 

Tax Considerations

Like any content we publish in our blog, we are always concerned about the tax implications. We want to explain and mention a disclaimer that we are NOT tax professionals.  What I write here is purely based on my own and my investors’ past experience. 

When investing in different vehicles with your retirement fund, you should consider tax advantages vs. disadvantages. 

For example, notes and debt interest are considered ordinary income, thus, will be taxed as such. When investing with a retirement fund, it is recommended to invest into assets that would be otherwise taxed as ordinary income because it is tax deferred in a retirement account. 

Passively investing in real estate such as apartments is great with your retirement fund when you are NOT a real estate professional.  The downside to investing in real estate is its inherent lack of liquidity - money can be held inside a deal for multiple years.  Comparatively, a retirement fund is supposed to be for your future.  If you are in your 20s, 30s or 40s, there could be more than 20 years to go before you can access a traditional retirement fund without penalties.  So the lack of liquidity does not really matter that much. 

Once you become a real estate professional who also owns property and works on projects at least 500 hours annually, you qualify for certain tax advantages.  Here is a link to one of my most popular articles that explains how I paid $0 in taxes in 2019.  It’s worth the read. 

The decision to use your retirement account for investment purposes becomes different because the tax advantages of these investments may be nullified due to the nature of the account. You don’t really get taxed until the moment you take the money from your retirement fund.  As such, if you had negative tax credits, you also cannot use this money in a tax deferral vehicle such as your retirement fund.  So it may be more advantageous to invest with your cash instead of a retirement fund in real estate, whether the work is passive or active. 

Conclusion

Retirement funds can be a stash of money that you got in the habit of not noticing.  But these accounts can work harder for you when you delegate them to alternative investments like the ones we mentioned above.  However, when we consider using them for non-traditional  investments, take the time to consider and plan for taxes and your personal goals. 

Next Step ...

You might have heard syndicators, note fund managers and other investors talking about how you can invest your retirement money into real estate.  In this article, we go in depths about How To Use "Lazy" Retirement Funds to Invest in Higher Yielding, Alternative Investments.