 Rolling
over 401(k) into a real estate IRA
|  Dear
Tax Talk,
I recently got a new job and have not done anything with
my 401(k) from my old job ($180,000). I'm 42 and have some rental homes besides
the one I live in. My question is, can I take my 401(k) money and roll it into
land or a building and keep putting off the tax till later? I don't mean a withdrawal
but a "401(k) for real estate." I can't find any information on it but
I hear that it's possible, as long as you don't live on site. -- Tim
 Dear
Tim,
You apparently hear better than you Google.
The term you need to use is "real estate IRAs" and you can turn up over
700,000 hits. When you terminate your employment, you can usually choose to roll
over your 401(k) account to an IRA or another qualified plan tax-free.
If
you put the money into an IRA and you want to use it for real estate, you'll have
to find an IRA custodian that will allow this type of investment. Your bank and
your broker won't, since they want you to invest in their products and it's also
a more complex administration. The custodian fees in a self-directed IRA will
be considerably higher than those that the bank or broker charge, especially for
real estate. For example, the custodian will charge for handling transactions
such as taking rent deposits and paying bills at anywhere from $5 to $25 an item.
In addition, you usually cannot have financed property in an IRA. Another
option you may want to consider is establishing a company to manage your rental
properties. Each property would pay a management fee to the company for your services.
Once you have a company, you can establish a 401(k) for its employees -- namely
you -- and roll in the money from your old job. You can be the trustee of the
plan and open its bank accounts, thus avoiding some custodian fees. You would
draw a salary from the company and use that as a basis to contribute to the plan.
You can put more money into the retirement plan than you can into an IRA. If after
paying salary and plan contributions the company operates at a loss, you can use
that to offset your salary from your full-time job. The process
for establishing a 401(k) is a little more involved than opening an IRA so I suggest
you find a CPA that can help you plan all this out. The fees that an accountant
will charge will be more than offset by the tax savings suggested.
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