Can I Invest in Real Estate with an eQRP, 401k, or IRA retirement account?
The short answer is YES.
But before we go into details about how you can use these accounts to invest in private asset classes such as real estate, let’s drill down the differences between eQRP, 401k, Solo401k and IRA accounts.
What is an eQRP?
An eQRP, or Employer sponsored Qualified Retirement Plan, is a tax-advantaged company retirement savings plan that provides incentives for small business owners, start-ups and the self-employed to save for retirement. An eQRP plan allows employers to deduct their contributions and offer employees the chance to invest into what is essentially a “mini” IRA account. Because of this, eQRPs are often compared to and confused with IRA or 401k plans that are more common knowledge.
What are the Top 5 Ways an eQRP differs from an IRA or 401k?
no annual contribution limits with an eQRP and earnings are not taxed until they are withdrawn
more flexible withdrawal rules with an eQRP
no employer matching with eQRPs
employees can opt-in at any time with eQRP
easier rollovers with an eQRP
By providing benefits such as tax-friendly contributions, increased control over assets, and easier access to funds than what is available with an IRA or 401k, the eQRP has become a popular option among those looking to build up their retirement funds quickly and easily.
What is a Solo401k?
A Solo401k is a retirement savings plan designed for self-employed individuals or small business owners who don't have any full-time employees other than themselves and their spouses. It allows you to contribute pre-tax money like a traditional 401k, but also adds the ability to make contributions through the business entity (e.g., an LLC or S Corporation) in addition to your personal contributions. The Solo401k gives you more control over how much money you can set aside for your retirement, and it allows you to use the funds in a variety of ways.
What is a 401k?
A 401k is a type of retirement savings plan sponsored by an employer. It allows employees to contribute a portion of their pre-tax salary into the plan for long-term savings and tax breaks. The money saved in a 401k can be invested in stocks, bonds, mutual funds, and other investments. The employer may also provide matching contributions or other incentives to encourage their employees to save for retirement.
What is an IRA?
An IRA (Individual Retirement Account) is a retirement savings plan in the United States that allows individuals to save for retirement with tax-deferred growth or on a tax-exempt basis. Contributions to an IRA may be deductible from income taxes and withdrawals during retirement are taxed as income. The two most common types of IRAs are traditional IRAs and Roth IRAs.
How can I invest in real estate and other private asset classes using my retirement funds? And what are the benefits in doing so?
Economic downturns can be frustrating for individuals with retirement accounts like IRAs and 401(k)s. When the market is taking a step back, retirement dates continue to draw closer. Holders of these accounts often want to:
Find ways to diversify the investment of their retirement funds
Avoid the ebbs and flows of the stock market
Stay ahead of inflation
What many account holders don’t realize is that they can invest in real estate and other alternative assets using funds in their eQRPs, IRAs, 401(k)s or Solo401ks. While investing in real estate is never without risk, moving retirement account funds into real estate can help individuals achieve the three objectives listed above.
Here’s a look at how it works.
Creating ‘Self-Directed’ Accounts
When individuals leave their jobs, they often roll 401(k) funds into other retirement accounts, like IRAs. The “rollover” is a common action taken to insulate retirement funds from tax exposure by moving them from one account to another.
You can also use rollovers to move retirement account funds into a self-directed IRA (SDIRA) or self-directed 401(k). With either, you can use the funds to invest in real estate or other alternative assets after the rollover is complete.
You’ll need to find what’s called a “custodian” to create your account. Custodians are typically brokerages or investment firms that hold the funds and handle the purchase of investments on behalf of the account holder.
What are the differences when using an eQRP (Qualified Retirement Plan) vs a Solo401k vs a SDIRA (self-directed IRA) retirement account to invest in private real estate syndications and other asset classes?
With an eQRP account, you enjoy the following advantages:
Speed: You can invest 24-48 hours after saying "go"
Taxes: Investing from a QRP avoids getting taxed via UBIT - learn about that here in an interview with Damian Lupo. Said simply: if you buy real estate that uses debt in the transaction (a loan on the property), IRAs may be taxed in a large and unpleasant way when the property sells. QRPs are not subjected to these taxes.
Fee Transparency: Fees are spelled out up front, whereas other IRA custodians tend to bury fees as %'s deep in fine print
You can borrow against it (up to a limit)
Enjoys most of the advantages of the eQRP account, but not all. It likely avoids UBIT tax
Self Directed IRA (SDIRA)
Slow turnaround time: typically 7-10 days to move on an investment opportunity.
Abundance of paperwork: custodian requires documents for review on each deal
Higher taxes: unless you are participating in cash-only real estate investments, investors who use a SDIRA account will likely end up paying significantly more in taxesChoosing Assets for Investment
Individuals typically use their eQRP, solo401k or self-directed accounts to invest in real estate, precious metals, cryptocurrency or other alternative assets.
You cannot use self-directed accounts to engage in self-dealing (investments that offer a benefit to you or a family member) or to invest in anything disqualified (like a family business). You also cannot use self-directed accounts to invest in life insurance or collectibles.
The Advantage of Investing in Real Estate Syndications
Many choose to invest retirement funds in real estate syndications, because syndication offers a series of advantages over the alternatives. Syndications offer:
Access to real estate deals that are out of reach for most investors
A fully passive investment opportunity (investors bring only capital to the deal)
Limited liability, as general partners take on all deal-related liabilities
The opportunity for reliable cash flow and a strong return upon sale
As noted above, there are no guarantees in real estate investing, syndication included. But syndications are attractive for the opportunities they present to retirement account holders looking for a passive way to invest their funds that offer the greatest opportunity for cashflow.
Why Don’t More Investors tap into their retirement funds?
Why don’t more investors take advantage of eQRPs, Solo401ks and self-directed accounts? Many simply aren’t aware of their options. Account holders are typically working with financial advisors who are incentivized to promote stocks, bonds, mutual funds, index funds and other traditional investment vehicles.
While investing in alternative assets like real estate can be beneficial to account holders, they aren’t always introduced to these non-traditional opportunities.
Learn More About Passive Investing
Many investors have funds in retirement accounts that they want to see grow year after year. But they are missing a blueprint for how to invest those funds in a way that helps them reach their financial goals. At Madison Investing, we offer a free, 7-part course called “Blueprint” that helps individuals connect their goals with investment strategies that work for them.