INVESTOR RESOURCES
RETIREMENT
Leveraging Your Retirement Account
CREATING MORE WEALTH FROM YOUR IRA
by Clint Coons, Anderson Business Advisors
W hen it comes to purchasing real estate with an IRA, the typical scenario works as follows: NO. 1 Roll you traditional IRA into a self-directed IRA NO. 2 Identify the investment then contact your self-directed IRA custodian to close on the property NO. 3 Going forward all income will flow to your self-directed IRA Consider Frank, who has $300k in his self-directed IRA and is looking to purchase two rental homes in Houston for $150k each. If the rentals throw off $1,600 monthly rental income, Frank's numbers might look as follows: Monthly Rent from Real Estate $3,200 Monthly Property Tax <$500> Monthly Insurance <$170> Income Tax <$0> NET MONTHLY INCOME $2,530
loans are paid off, assuming two per- cent annual property appreciation:
rental homes at $150k each. Now Frank’s numbers will look as follows:
IRA WITH 2 RENTALS
IRA WITH 6 RENTALS
Monthly Rent from Real Estate $9,600 Monthly Property Tax <$1,500> Monthly Insurance <$510> Income Tax <$4,000> NET MONTHLY INCOME $3,590
Property Future Value
$543,000 $1,600,000
Added Cashflow $1,217,000 $1,257,000
TOTAL AT RETIREMENT $1,800,000 $2,857,000
Using leverage adds $1,000,000 in value to Frank's retirement, but what if Frank could increase it even further just by changing the entity he uses to purchase the real estate? All it requires is to change how he structures his IRA investments. The additional $550,000will come fromeliminating theUDFI tax his IRA must pay for leveraging his assets. To eliminate the tax, Frankwill shift his investing into a self-directed solo 401k by rolling his IRA into the self-directed 401k. Inmaking this one change, hewill earn an additional $13,0000 a year. Here are the numbers againwith the solo 401k:
ANNUAL INCOME
$43,080
As good as this number looks (an additional $13k a year in income), Frank must face the Unrelated Debt-Financed Income tax, which is a tax that IRAs (and other exempt entities) must pay on income gener- ated from the use of debt financing. Frank's UDFI tax will be 37 percent of his IRA income. Similar to how you would calculate your income tax on real property owned in your name, IRAs are entitled to the same de- ductions, i.e., mortgage interest and depreciation. After taking this into account on the six rentals, Frank’s IRA will pay $11,500. Frank's annual income will look as follows:
ANNUAL INCOME
$30,360
IRA WITH 2 RENTALS
IRA WITH 6 RENTALS
SOLO 401K
Not a bad return; however, Frank could do better if he understood that his IRAs could use the leverage provided; Frank does not guarantee the loan. This type of financing is referred to as a non-recourse loan, i.e., the lender can only look to the property as collateral in the event of default. Assuming Frank finds a lender, who requires 30 percent down, Frank can use the $300k in his self-directed IRA to acquire six
Property Future Value
$543,000 $1,600,000 $1,600,000
Annual Income
$43,080
Federal Income Taxes
<$11,500>
Added Cashflow $1,217,000 $1,257,000 $1,744,000
ANNUAL INCOME
$31,580
TOTAL AT RETIREMENT
Some might think the extra $1,000 annually is not worth the risk of six leveraged rentals over two that are debt-free. This type of thinking misses the larger picture. Look at the numbers 30 years out when your
$1,800,000 $2,857,000 $3,344,000
Assumptions aside, this illus- trates how using a proper entity structure can help you achieve your financial goals faster. •
98 | think realty magazine :: may 2020
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