Over the past 10-15 years the idea of using a Self-Directed IRA or 401(k) to buy rental property has started to pick up steam with investors, especially as they transition from traditional employment. But one frustration that folks have with the limitation that you cannot personally profit from your IRA’s investments under these arrangements – all income must go back to the IRA or 401(k) under the common Self Directed IRA program. However there is another program that can be used to fund a business of any kind – including a Real Estate Investment business – where it is required that you take a salary and other benefits from the company.
This arrangement, known as 401k Business Financing by some, and as Rollovers as Business Startups by others is becoming increasingly popular as people grow tired of relying on the stock market to grow their retirement savings and at the same time seek to free themselves from the employment game. The program was first passed into law in the 1974 law known as the Employee Retirement Income Security Act (ERISA). Since then the IRS has added additional regulations that have made it even easier to understand the rules and correctly use retirement funds to invest in a business pretax.
The beauty of investing in a business pre-tax is that each dollar invested is up to 39.6% more powerful than any post tax investment. Another way to put that is that a post-tax investment of $1 costs you $1.40 when you account for maximum taxes but you only get to use $1 to grow your business. Pretax money costs you $1 and gives you $1 to spend!
When you invest your retirement plan into a business, be it Microsoft, Apple or your own business the value of your account is directly tied to the value of that business. If Apple’s next iPad breaks sales records, your Apple stock value will grow. If you invest your retirement plan in your own real estate business and you generate lots of income via rental or resale of property, then your retirement plan’s investment in the business will grow in value too.
This law requires that you are a real employee of the business your retirement plan invests in. This is not to say that you cannot hire other employees but rather that you must be a paid employee of the business. You can be your business’s sole employee or not as your business’s needs dictate. You’ll also be required to try to make a profit. If you can meet those requirements, it is likely that you are eligible to invest your retirement plan into a real estate business that you run and take a salary for running.
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