Buying property or real estate with an IRA, 401k, 403b, 457b or other retirement plan

real-estate-ripoff-01-afVery few people know that they can actually use their retirement funds to purchase real estate and or property to hold as an investment. The fact is, there are great deals to be had right now, much more in real estate than even the stock markets, and most people don’t even realize they have this money available for this use. This article will explore the various nuances with regards to investing in property with your retirement funds and how to go about doing so if you so decide.

There are very big differences in investing with IRA money and 401k money, below we will help you better understand what they are and what to watch out for to prevent tax issues from undermining your profits.

First, let’s talk about someone who is currently working for an employer and they have a chunk of money to work with in their 401k plan. In most cases, employer plans forbid you from cashing out your entire plan- and the only way to access your money for reasons other than hardship is to take out a loan against your money. In essence, the plan will lend you your money at a really reasonable interest rate – currently anywhere from 4% to around 5.5% and payroll deduct your payments to pay for the loan. The process is fairly quick and you can typically have the proceeds within 10 days. The problem being, their are limits to the amount you can withdrawal (most companies only allow you to withdraw 50% of your vested balance) and often no more than $50,000. Ultimately, purchasing real estate property by a loan through your 401k plan is not nearly as flexible as purchasing through an self directed IRA (which we’ll talk more about below). There are other restrictions too, but these apply to all investments and this relates to your not being able to use the property as a residence of your own. Not to mention, your subsequent real-estate purchase won’t be eligible for the mortgage-interest tax deductions.

Now, if you have an old 401k plan from a former employer, you can easily roll that over into a self directed IRA and begin purchasing your investment property and have access to all your money – versus the restrictions placed on those whom are actively participating in their firms 401k.

An alternative for those in 401k plans is to invest (if offered) in real estate investment trusts also known as REITs.

Some companies will allow you to roll your existing 401k money over to an IRA, however, you will have to pay a 10% penalty if you don’t meet the age requirements.

Now, for those people with IRAs, you should be able to move them into a self-directed IRA, however, sometimes this is more complicated than you would like – so make certain you really have a great buy before going through the hassle. As mentioned, the process you would need to complete entails moving your IRA funds into a self directed IRA and choosing a special independent “IRA custodian” that handles these matters.

Not only can you invest in real estate, but also you can gain the ability to invest in private corporation offerings and the like. You should certainly compare the costs in your local area to better understand what type of custodian works best for your needs. It surely doesn’t make sense to pay for more than you’ll use.

IRA simple or simple IRA is the retirement plan solution for your small business

simple iraAccording to the IRS, the IRA simple or SIMPLE IRA plan is designed for the small business, specifically those with less than 100 employees. However, there are some exceptions to that rule of which we will discuss among other items below in this informative article. Namely, we will discuss what the IRA SIMPLE can provide in the form of retirement plans for your small business and employees, and how you can go about setting one up for your company. It truly makes sense to provide these benefits to help attract and retain employees to your business.

The exception to the 100 employee limit is the 2 year grace period allotted by the IRS for those businesses that may have gone over the limit.

A couple of quick benefits to be noted with this particular plan is that employees are allowed to defer compensation through their simple ira, as well as employees are immediately 100% fully vested in the plan with regards to their contributions.

The Details

As an employer you can choose to either match your employees’ contributions up to 3% of pay or a 2% nonelective contribution can be made for each eligible employee. Bottom line, if the employee does not contribute, the employer still must make a contribution to their plan of at least 2% of their employees’ pay. A caveats to keep in mind before selecting this type of plan for your employees would include the fact that they are not allowed to particpate in any other retirement savings plan. The upside is that simplicity in getting started, which only should take a few minutes as there are only a couple of forms to fill out and get going. Moreover, it’s truly simple and inexpensive to setup and maintain. Not to mention, you begin to enable your employees to start taking control of their own financial future, do help them slowly lose the thought that somehow social security will be there when they retire – which for many in the younger generations – simply won’t likely be there. Not to mention, there is no discrimination testing required. On the flip side, there are inflexible contributions, and somewhat lower contribution limits than other self directed IRAs. That shouldn’t be an issue though – considering they are getting “free money” from their employer, which they wouldn’t get doing this on their own. No matter what, they can choose to participate or not, at least you’re offering it.

With automatic enrollment, the process can be simplified by deducting a fixed amount or percentage from the employees’ paycheck. Check out Notice 2009-66 / 2009-67 to get more information on automatic enrollment.

Contribution Limits:
Employee – $10,500 in 2008 and $11,500 in 2009.  If the employee is age 50 or over, a “catch-up” contribution is also allowed.  This additional catch-up contribution amount is: 2008 and 2009 – $2,500.

Participant Loans: Not permitted.

In-Service Withdrawals: Permitted, but withdrawals are included in income and are subject to a 10% additional tax if the participant is under age 59-1/2.  Also, if withdrawals are made within the first two years of participation, the 10% additional tax is increased to 25%.

Opening an IRA is as simple as 1,2,3..

RecessionWhen you sit down and figure out that you want to sock more money away, because you’ve maxed out your 401k, you should consider investing in an IRA. Typically, people who are making catch-up contributions choose this option because their company only allows them to reach a certain point, and if you choose to invest more, you need to know where and how. There are numerous places to buy an IRA, and below I will discuss several options.

Vanguard, T. Rowe Price, Fidelity, Edward Jones, A.G. Edwards, USB, are among many large companies that can help you. Not to mention, you can buy either a traditional or roth IRA through your local bank. If you want more information on choosing between the two types of IRAs, this site offers sound advice. Click here for more articles about IRAs.

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If I open a Roth or traditional IRA, would I be better off investing in mutual funds or ETFs?

What are the advantages and disadvantages of each?

Nobody else is going to look after you in your retirement. It is up to you. So do not let there be any ‘ifs’ about it. WHEN you open your Individual Retirement Account, IRA then you can get into the question of whether a mutual fund should be an exchange trade, ETF fund or not.

An IRA is essential because it is your personal tax haven that the government has given unmissable tax benefits to. You are allowed to save/invest up to $2,000 each year into your IRA. Depending on your annual income and whether you currently have an employer-run retirement plan, you can deduct tax for the sum of money put in your IRA. Once in your IRA tax haven the money grows tax-deferred. You can invest this money in stocks, bonds, mutual funds, or other allowable types of investments to grow your IRA money tree.

You can grow your IRA money tree in the soil of the stock exchange in three different ways. Firstly you can work through a broker and trade directly in stocks. For example buy stocks in your favorite corporations such as Apple or Coca-Cola. Your money will grow because each year these corporations pay some earnings per share and will probably be worth more when you come to sell them too. The downside is of course that your chosen stocks may be in corporations that go broke like Bear-Stearns or Enron.

The second way you can grow your IRA money tree is by contributing to a mutual fund. This is a pot of money that is professionally managed and invested in stocks on behalf of the contributors. As the stock exchange values grow so does the value of the mutual fund and so does your share in it. The stock market has its ups and down but generally the trend is up. So it is has been a good long-term investment for IRA’s.

Exchange Traded Funds ETFs are portfolios of stocks, bonds or in sometimes alternate investments that are bought and sold the stock exchange just like Apple or Coca-Cola stocks. The advantage of ETFs is that grow your money more because they payout like stocks and appreciate in value like stocks. But while they have a bigger upside they also have a bigger downside.

Currently nearly all ETFs are index funds, which means that they follow the performance of one or more stock or bond market indices. “Spiders” for example track the Standard and Poor’s 500 index of corporate stocks while “Qubes” (their NYSE ticker symbol is QQQQ), follow the 100 largest non-finance stocks on the NASDAQ.

In conclusion you can choose from a variety of nearly 200 different types of ETFs but remember the bigger the return the greater risk of loss.

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Best mutual funds for a Traditional or Roth IRA

It really means going back to basic principles and shopping around when choosing the mutual funds for a ‘Roth’ IRA, or indeed a traditional IRA. An IRA is of course an Individual Retirement Account. It is the money that you invest in order to provide an income throughout your sunset years.

The money in mutual American funds comes every month from the salary accounts of individual workers everywhere and is also contributed to by the employers of those workers. While the money is taken automatically from pay the individual still has some discretion over how their retirement fund is invested. So ‘which are the best funds for your IRA’? is an important question.

The obvious answer to the question is; the mutual American funds that perform best in terms of earnings and capital growth are the best funds for an IRA. But how do you know the future performance of the funds will be as good as the past performance. There are many league tables of mutual fund performance and indeed the funds themselves and advertisements push one year and three year performance figures to attract new investors.

While past performance is important when looking for the best funds for your IRA there are seven other things to look out for:

1. Check out the fees charged for the various fund services. Never put your money into a mutual American fund that charges more than the average in its category. Morningstar’s web site compares all of the fund’s expenses with the average. Past expenses are a good indicator of future fees. There are many good low-cost mutual funds.
2. Check out turnover rates. The lower the turnover rate the better because dealing in shares is expensive. For example the Mairs & Power Growth fund has turnover rate of 2% per annum but it also has a 10-year average annual return of 17.5%.
3. Don’t fall for the hype. Advertising is an expense out of the current fund. They are using your money to attract new investors.
4. The best funds for an IRA over the long term will be the funds that have continued to produce results over the long term and in particular over the extraordinary times as in1999. How did they perform then? It shows how the managers cope with the market fluctuations. The Morningstar website gives full historical returns for all mutual American funds.
5. Are they well balanced in terms of size. The best funds for a Roth IRA are those most committed to managing funds rather than going all out for growth. Look for those that close the doors when they have the optimal fund dollars.
6. Index funds are those that simply follow a particular stock market index such as the Standard and Poor 500. Some mutual funds are index funds in disguise and charge more for the privilege. Avoid them, they are not the best fund for your IRA.
7. Finally the best funds for an IRA are those that have a stake in the investment along with the IRA contributors. They aren’t simply paid professional managers but they also win when the fund wins and lose when it loses.

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Rollover Ira – I need help with my IRA rollover

“There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are viewed as obsolete under current tax law (their functions have been subsumed by the Traditional IRA) by some; but this tax law is set to expire unless extended. However, some individuals still maintain these accounts in order to keep track of the source of these assets. One key reason is that some qualified plans will accept rollovers from IRAs only if they are conduit/rollover IRAs.” – found here.

So you want to rollover your IRA?

“A rollover (sometimes referred to as a 60 day rollover) can also be used to move IRA money between institutions. A distribution is made from the institution disbursing the funds. A check would be made payable directly to the participant. The participant would then have to make a rollover contribution to the receiving financial institution within 60 days in order for the funds to retain their IRA status. This type of transaction can only be done once every 12 months with the same funds. Contrary to a transfer, a rollover is reported to the IRS. The participant who received the distribution will have that distribution reported to the IRS. Once the distribution is rolled into an IRA, the participant will be sent a Form 5498 to report on their taxes to nullify any tax consequence of the initial distribution.” – found here.

Interested in learning how to avoid a 10% penalty on an early withdrawal from an Ira – go here to this great article I wrote.

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Ira Sep explained in simple terms

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. There are no significant administration costs for self-employed person with no employees. If the self-employed person does have employees, all employees must receive the same benefits under an SEP plan. Since SEP accounts are treated as IRAs, funds can be invested the same way as any other IRA.

For a detailed reading on SEPs, see IRS Pub 560.

Deadline for Establishment and Contributions:
Filing deadline for employer’s tax return, including extensions.

Employee eligibility conditions may not be any more strict than (i.e. can be less strict):
1) be at least 21 years of age
2) has worked for the employer for at least three of the previous five years, and
3) received at least $500 in compensation for the tax year

must be eligible for the employer’s SEP-IRA plan.

SEP-IRA funds are taxed at ordinary income tax rates when qualified withdrawals are taken after age 59 and a half (the same rule as for traditional IRAs). Contributions to an SEP plan are deductible; they will lower a taxpayer’s income tax liability in the current year.

Contribution Limits

SEP-IRA contributions are treated as part of a profit-sharing plan. For employees, the employer may contribute up to 25% of the employee’s wages to the employee’s SEP-IRA account. For example, if an employee earns $40,000 in wages, the employer could contribute up to $10,000 to the SEP-IRA account.

The total contribution to an SEP-IRA account should not exceed the lesser of 25% of income (20% for self-employed before self-employed tax deduction is included; see below) or $42,000 for 2005, $44,000 for 2006, $45,000 for 2007; $46,000 for 2008. Contributions may be made to the plan up until the date that the employer’s return is due for that year.


The contribution limit for self-employed persons is more complicated; barring limits, it is 18.587045% (approximately 18.6%) of net profit. The computation is in IRS Pub 560, section 5, Table and Worksheets for the Self-Employed, specifically Deduction Worksheet for Self-Employed.

The two issues are:

  • FICA tax
  • Reduced rate

FICA tax

SEP contribution limits are computed, not from net profit, but from net profit adjusted for the deduction for self-employment tax (2006 Form 1040, line 27, from Schedule SE, Section A, line 6, or Section B, line 13). Barring limits, this is half the 15.3% FICA tax, levied on net earnings, which are 92.35% of net profit. Thus adjusted net profit (net profit minus deduction for self-employment tax) is 92.935225% of net profit; note that adjusted net profit is close to but slightly more than net earnings.

Reduced rate

The limit of 25% applies to wages, not (adjusted) net profit.

In the above example, where an employee earns $40,000 and the employer contributes 25% of that, $10,000, the employee has received $50,000 total, of which 20% goes to the SEP-IRA.

When a business is a sole proprietorship, the employee/owner both pays themselves wages, and makes an SEP contribution, which is limited to 25% of wages, which are profits minus SEP contribution. For a particular contribution rate CR, the reduced rate is CR/(1+CR); for a 25% contribution rate, this yields a 20% reduced rate, as in the above.


Thus the overall contribution limit (barring limits) is 20% of 92.935225% (which equals 18.587045%) of net profit.

For example, if a sole proprietor has $50,000 net earnings from self-employment on Schedule C, then the “1/2 of self-employment tax credit”, $3,532, shown on adjustments to income at the bottom of form 1040, will be deducted from the net earnings and the result is multiplied by 20% to arrive at the maximum SEP deduction, $9,293.

Note that net earnings INCLUDE the proposed deduction for contributions to your own SEP-IRA. In this example, the sole proprietor has therefore $59,293 in net income before his (maximum) SEP-IRA contribution.

IRS Publications and Forms

All of the above and more found here.

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Pre-tax vs. After-tax Contributions – A Comparison of Traditional IRA and Roth IRA

Understanding pre-tax and after-tax contributions for IRAs (Individual Retirement Accounts) can seem somewhat complicated if you don’t know the basics of the two types of IRAs: Traditional and Roth. The Traditional IRA is an individual savings plan that is tax-deferred – you don’t have to worry about paying taxes until you withdraw the money you’ve been contributing (penalty free after age 59 1/2). On the other hand, with a Roth IRA, your withdrawal will be tax free at retirement because you are paying taxes before you contribute to the plan. Pre-tax and after-tax contributions make a difference, because it can increase or decrease the amount you are investing with each contribution.

For some, having to pay taxes at withdrawal time works better because the possibility of them having a lower income at retirement age and being put in a lower tax bracket can essentially save them money. However, others would prefer not to have the burden of being taxed at all at the later date and thus choose the Roth IRA.

Here’s a quick example to see how either would work: Say you contribute the maximum allowable amount for one year of $5,000 to your traditional IRA. Because it is tax-deferred, you won’t be taxed on the amount you contribute initially. This means, down the road if you were to only contribute the $5,000 then attempted to withdraw it at the appropriate age (59 ½), that $5,000 would be taxed upon withdrawal as if it were income that you earned that year. If you suspect that your income will be lower in your retirement years, then you might feel that you can benefit from this plan. Meanwhile, if you contribute to a Roth IRA, you will be taxed one time for your contribution the year you contribute, and you won’t be taxed at all for the money you take out at the appropriate withdrawal time.

So the decision of which to choose comes with figuring out whether you would rather be taxed according to your current income, or the income you’re likely to have at retirement age. For some younger people, paying taxes now may be cheaper than paying later as their income is probably lower now, and their tax bracket is as well).

Because IRAs don’t allow for as large a contribution each year as a 401k, you may feel that being taxed now with the Roth IRA wouldn’t hurt, so just to get it out of the way. However, if you want to hold on to as much money as you can (and have as much money working for you as possible), then the Traditional IRA just might be the way to go.

Either way, if you’re looking to go with a traditional or Roth IRA, now is the time to make some important decisions so that you can decide which plan is ultimately best for you.

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When must you withdrawal money from your IRA?

This is usually not a problem for most people, however, some have been so diligent in their investing and saving that they have an abundance of loot, so much in fact they don’t start making withdrawals until it’s too late. Too late you ask? Yes, the fact is, you must begin making withdrawls from your traditional IRA no later than April 1 of the year following the year you reach 70 and 1/2. For many of us, this will be more of a concern for helping mom and dad manage their retirements. If you don’t withdrawal the required amount, you will be forced to pay a fat %50 penalty on the difference between what you should have withdrawn and what you actually did withdrawal.

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