Ann Arbor Michigan Buyers Tap Resources

Ann Arbor Michigan Buyers: A Source of Capital You May Not Have Considered

Buyers have a source of investment capital that they haven't considered -- their pensions.

Many people don't know that they can use their pension funds to invest in real estate. The truth is it's entirely possible and perfectly legal -- with a self-directed pension plan.

Any time a pension fund allows someone to control his or her own investment decisions it's a self-directed plan. But the term "self-directed" can be misleading, especially when you are limited to investing in a list of stocks or mutual funds provided by your plan's administrator. If you have a truly self-directed plan, you can invest in just about anything you want, as long as it
fits within IRS guidelines.

So many things are included in the IRS guidelines that even the IRS doesn't bother trying to list them all. Instead the IRS lists only those things pension plans can't invest in. If it's not on that list, then you should be okay making the investment, so long as the transaction isn't barred under the "prohibited" transaction rules or the "disqualified persons" rule.

Prohibited transactions include:
- The sale, exchange or lease of any property between a plan and a disqualified person
- Furnishing goods, services or facilities between a plan and a disqualified person
- Using any portion of the IRA as security for a loan by a disqualified person, and
- Use of income or assets of a plan by a disqualified person for his or her own benefit
- Disqualified persons are the plan owner, the plan administrator, and the plan owner's lineal family members (i.e., children, grandchildren, parents, grandparents, etc.). Other relatives, like brothers, sisters, aunts and uncles are not considered disqualified under IRS guidelines.

Until recently there wasn't a lot of choice in truly self-directed plans: you either had some type of tax-deferred IRA (regular, SEP, Spousal, etc.) or a tax-free Roth IRA. Both serve a great purpose, but there are income and contribution limitations, especially for Roth IRAs, and many high-end clients may have been prevented from contributing to a Roth IRA altogether.

A couple of years ago, though, the government widened the playing field by introducing a special "solo 401(k) plan," which was designed for sole proprietors and single-person businesses. And this year the pension plan field was blown wide open with the creation of something called a Solo Roth 401(k). This plan combines the tax-free features of a Roth IRA with certain tax benefits of a regular 401(k) plan, with a couple of key differences, namely there are no income limitations and the contribution amounts are much higher. Up until now a couple has been able to contribute a maximum of $8,000 per year into an IRA or a Roth IRA; with the new Solo 401(k) and Solo Roth 401(k) plans that contribution limit goes up to a whopping $88,000 for couples, or $98,000 for couples over age 55. To qualify to open one of these solo plans, you must own your own business, have no employees working more than 1,000 hours per year, and must be receiving W-2 or 1099 income (so clients receiving only passive income from an LLC would not be able to qualify).

If you don't have enough money to buy real estate outright with pension funds, don't worry. You can combine one or more smaller funds together to make a single purchase, or you could approach one of a growing number of mortgage brokers and financial institutions that offer loans to self-directed pensions. This is a particularly effective strategy to use with the Solo 401(k) plans, as these plans don't require you to pay tax on the earnings that are derived from loans to the pension plan.

There are estimates that say there is approximately a trillion dollars sitting in pension plans in America. Imagine what that money could do in the real estate market. So if you are looking for new sources of capital to expand your real estate portfolio, get familiar with the basics of pension fund investing.

Remember to consult with your professional financial advisor before making decisions: or call us at 734-669-0337 or info@kathytoth.com.

Written by Diane Kennedy