Question: Hello Quincy, hope all is well with you. I need some guidance in putting a small 20 unit apartment complex deal together at around $600K. On August 1, 2012, I will be given my $105,000 401K funds that I will be transferring over to you because my company is being bought out. Is there any way for me to use these funds towards purchasing this apartment complex? I have a private investor with a 100k self -directed IRA available to me, but the bank is not going to allow a second on the property and they are going to require that the 30% come from me. I am sure that in all your daily dealings you probably see this kind of scenario pop up and that is why I need your advise in structuring this deal? I will more then likely need around 30% ($180,000) to put this deal together which I have available if I include the 401K funds. This property will be held in a LP which is already established, please let me know if there is any other information that you need.
Answer: Regarding the transfer of your 401(k), I assume you will be choosing to do a direct rollover into your IRA. If you take the funds as a distribution and then roll them over they are required to withhold 20% and send it to the government. If you wish to rollover the entire amount, then you would be required to pull the 20% out of your pocket and get credit on your next tax return. Not a good idea. With a direct rollover the check is made out directly to Quest IRA, Inc. FBO Client Name IRA #[Acccount #]. If you need help with that part, let our new accounts department know and they will be happy to guide you.
As far as the structure of the deal, mixing your personally with your IRA is going to be difficult if not impossible to do without violating the rules. The reason for this is that you cannot benefit personally from your IRA’s investments (except of course when you take distributions from your IRA). Also, you cannot personally guarantee any indebtedness of your IRA. This means, for example, that you cannot purchase the property in an LP owned partly by your 401(k) and partly by yourself personally, since the bank would require a personal guarantee from you for the entire loan amount.
Also, even if you found a way to get the deal done with a loan from the bank which was non-recourse (is this possible?), the investment would generate unrelated business income and your IRA may be subject to taxation. This may be okay if the investment is profitable enough, but you do have to take the taxation into account when deciding whether or not to do the deal. I have a couple of investments that cause my 401(k) plan to file a tax return and sometimes to pay taxes, but they are such good deals that I find the after-tax returns to be well worth it.>>
You can call me or Nathan Long anytime you like if you need more information, although Quest IRA, Inc. cannot give you tax, legal or investment advice. Have a great day & hope that helps!
Follow Up Question: Thanks for the information, I was not sure how I should do the roll over to Questira. If my final goal is to turn this 401k into a Roth Ira to grow tax free, I roll it over to Quest Ira as a distribution minus 20% to government and I am done? Then this should not effect my income taxes for 2012 since I left the 20% distribution fee behind, is this correct? I know you cannot give tax or legal advise, but I just want to know the possible consequences depending on what I decide to do with the money.
Follow Up Answer: It doesn’t quite work that way. The amount you convert to a Roth IRA is simply added to your taxable income for the year. For example, if you have $100,000 in taxable income in 2012 and convert $100,000, now you have to pay taxes as if you made $200,000 of taxable income. So obviously the higher your marginal tax bracket the higher your taxes will be on the conversion. The 20% withholding for a distribution from your 401(k) is just like a down payment on your taxes. Ironically you are both taxed and penalized on that money that is sent to the government! You are always better off doing a direct rollover and then next year, if you absolutely have to, you can remove some money from the Roth IRA to pay taxes on the conversion. In this case you would still have to pay the 10% premature distribution penalty next year unless you had a Roth IRA previously and were removing your contributions and/or previous Roth conversion money that had been in the account for at least 5 years.
Follow Up to the Follow Up: Wow!! I do not see how u keep up with this stuff, but I am glad u are able to explain it in plain English for my comprehension. I will just rollover my 401k to you and figure out what I might want to do later. Thank you so much for spending the time.