When investing in real estate with CCP, most individuals will utilize their discretionary funds to invest.  However, several other methods have gained traction in recent years, including self directed IRAs and Cash Balance pension plans.

Self Directed IRAs

A large majority of retirement account owners have their funds in company 401(k) accounts, private pension plans or in brokerage account IRAs.  These account owners are usually not allowed to invest their funds into real estate or other “alternative” investments.  This is not the result of any legal restriction under federal law.  The reason is that the large financial institutions that administer most U.S. retirement accounts don’t find it administratively feasible to hold real estate or non-publicly traded assets in retirement plans.  Additionally, most of these institutions are in the business of selling stocks, bonds or mutual funds.

This is where self directed IRAs come into play.  They are administered by an IRA custodian who allows the IRA owner to invest into any investment allowed by law, including real estate.

Your ability to self direct your current retirement plans depends on whether you are able to rollover or transfer funds to a custodian who allows you to self direct your IRA.  For example, if you have an existing IRA with a brokerage or bank, that IRA can always be transferred or rolled over to a custodian who allows you to self direct your account and who won’t restrict your investments to mutual funds, stocks, and bonds.  Also, if you have an old 401(k) account from a former employer, you are able to roll over those funds from your 401(k) account to a self directed IRA custodian by doing a rollover.

IRA rollovers are not an all-or-nothing proposition.  You can use an IRA rollover to move just a portion of your funds from one IRA to another, or to roll over just part of a qualified plan to an IRA.

If you have a 401(k) or other type of company-sponsored retirement account with a current employer, your employer’s plan might allow for what is called an “in-service withdrawal.”  Under law, the employee must be 59 ½ and you can only withdraw employee deferrals/contributions as employer contributions cannot be rolled out while still employed.  According to the IRS, 62% of 401(k) plans allow in-service withdrawals that are not based on hardship.

A retirement account may be moved to a different custodian by one of the following three methods.

  1. Trustee to Trustee Transfer– This is a tax free movement of your retirement funds from the current custodian to a self directed custodian. For example, a trustee to trustee transfer would occur when your brokerage IRA at your current custodian is transferred directly to your IRA at a self directed IRA custodian.  No tax reporting or withholding occurs on a transfer.
  2. Direct Rollover– A direct rollover is a trustee to trustee transfer from your 401(k), 403(b), or other employer account directly to your self directed IRA custodian. The account owner does not touch the funds.  A Form 1099-R is issued, however, it will contain distribution code H in box 7 which indicates to the IRS and the account owner that a direct rollover occurred and that the 1099-R is not taxable.
  3. 60-Day Rollover– A 60-day rollover occurs when your funds are distributed to you from your current retirement account (IRA or employer plan) and re-deposited into a new retirement account, such as self directed IRA, within 60 calendar days. Failure to re-deposit the rollover funds into an IRA within 60 days will result in distribution of the account funds and any applicable taxes and early withdrawal penalties will apply.  When conducting a 60 day rollover, your custodian reports the distribution to the IRS and may withhold 20% for taxes.  Additionally, you can only conduct one 60 day rollover per account per year.  As a result, the preferred method of moving funds to a self directed IRA is by a trustee to trustee transfer or as a direct rollover.

Regardless of the method used, the amounts transferred or rolled over (within 60 days) stay as tax favored account funds and are not distributions subject to any tax or penalty.  In conclusion, the transfer or rollover is simply the process of moving from a custodian who will not allow you to self direct your IRA to a custodian who will allow you to self direct your IRA.

Real estate is the most common investment made by self directed retirement plan investors.  When purchasing real estate with an IRA, the IRA must be listed on the contract as the buyer, and it is the custodian of the IRA and not the IRA owner who signs the contract to bind the IRA.  Once the contract is ready to be signed, the IRA owner will send it to his or her self directed IRA custodian with a direction of investment form, instructing the custodian to sign the contract for the IRA.

Cash Balance Pension Plans

Compared to self directed IRAs, Cash Balance pension plans are a relatively unknown retirement vehicle, however, they may also invest in real estate.  They are commonly referred to as “hybrid” plans because they combine the high contribution limits of a traditional defined benefit plan with the flexibility and portability of a 401(k)

Similar to IRAs, 401(k) plans, and traditional defined benefit plans, there are federal pension laws that govern cash balance plans.  Also, new IRS regulations have expanded investment options for the plans, minimizing many funding issues.

Individuals or companies considering cash balance plans to invest in real estate should work with qualified experienced professionals who can discuss the pros and cons and tailor a plan design to meet their goals.

Asa L. Shield, Jr.,  CPA

CCP Commercial Real Estate