Your guide to investing in real estate with a self-employed retirement plan
Investing money for retirement is one of the wisest and most difficult decisions that entrepreneurs make. Saving money for them instead of using it for growth takes a lot of persuasion. The benefits of the self-employment retirement plan, in a way, help in the process and one of the most important benefits of these plans is the ability to invest in real estate. Self-employment retirement plans allow individuals to invest in a wide range of non-traditional investment options.
Step 1 – Open a self-employed 401k account and fund it
The process begins with the opening of a self-employed 401k plan in the name of the professional. This account will be the signature with the right of ownership. It is important that any legal or processing costs involved in the transaction go from the funds available in this account for a qualifying purchase.
One can open a 401k account on their own with the help of banks or other financial institutions. After receiving the required account documents, a bank account can be opened in the name of the retirement plan.
The next step in the process is to fund the account with the options available, such as funding with regular deductible contributions, transfer from the previous employer’s fund or individual 401k account, savings savings plan and even defined benefit plan.
Step 2 – Select a purchase method to purchase desired real estate
After you have sufficient funds in the self-employed 401k account, it’s time to start the real estate transaction. Under currently available methods, one can purchase the entire property with cash available in this bank account. Another option available is to sign a common lease for the desired part of the property. The final method of purchasing real estate with a self-employment retirement plan is to purchase the property with a non-recourse loan.
A non-recourse loan uses the property in question as collateral and, taking into account the higher risk factor, these loans are comparatively expensive.
Step 3: Prepare a contract and buy the property
Following the selection of a purchase method, the individual must prepare a contract for the purchase with property in the name of the retirement plan. Property cannot be purchased in the account holder’s name, but only from the account, per IRS rules. At the time of closing, the owner of the self-employed 401k plan would sign all documents as trustee of the account and provide a check from the 401k account. After the closing of the transaction, any operating expenses of the property would be paid solely from this bank account.
