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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

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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.

Bankrate.com's corrections policy-- Posted: Oct. 26, 2005
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