It could be because it’s tax season (have you filed or extended yet?)…
…but it seems like the topic of investing in syndications and other private placements using retirement account funds has come up a lot recently.
There’s a tremendous amount of money invested through retirement accounts. At the end of 2023, it was estimated that $38.4 trillion was locked up in so-called “tax advantaged” accounts, like 401(k)s and IRAs.
And contrary to what Fidelity or Schwab says if you ask them, this money can be used to invest in syndicated real estate deals.
I often speak to investors who learned about syndications later in their professional career. They’ve worked a decade more more, and followed the standard advice to save/invest through a 401(k). And now, thanks to the above-average returns in the stock market the past few years, they’re sitting on a healthy balance in their retirement accounts.
They’ll see the $50K+ minimum investment amount for a syndication and think “I don’t have that just lying around.” And while that may be true, they forget that they have several hundred thousand (or more) invested in a target-date fund locked up inside an IRA.
And by using a self-directed IRA (SDIRA), or a related variation, these funds can be unlocked and deployed into higher-return, lower-risk investments than are available in a normal IRA.
Why Invest Through an SDIRA?
Unlock money stuck in subpar investments - most IRA providers give you very little choice in what you can invest in.
Get exposure to alternative assets through existing wealth - you don’t have to have significant cash-on-hand to invest in syndications.
Enjoy tax-free growth - like a regular IRA, you’re not taxed on investment gains until you withdraw (with some exceptions, see below).
Moving to an SDIRA
If you’ve ever rolled an old 401(k) into an IRA, you already know how to move to an SDIRA. The process is more or less identical:
Select a custodian - think Fidelity (or even Robinhood 😬). It’s the company that oversees your account and legally makes investments on your behalf. There are lots of SDIRA custodians, and several that specialize in working with real estate investors. I haven’t personally used them, but I see Equity Trust Company recommended frequently, and I have a few investors who’ve had a good experience with them.
Transfer funds - your custodian will guide you through their specific process, but typically they will do all the work for you (a direct rollover), or you take a distribution from your current IRA and deposit those funds into the new SDIRA within 60 days (a 60-day rollover).
Invest - once you’ve funded your SDIRA, you’re ready to start investing.
Strings Attached
Of course, any time the government gets involved, there are strings attached. An SDIRA is still an IRA, meaning it’s subject to all the normal IRS limitations around contributions and withdrawals.
Also, keep in mind that you usually can’t roll over a 401(k) at your current job. But check with your employer’s 401(k) administrator to see if they allow “in-service” rollovers, either in partial or full.
A few other things to keep in mind:
SDIRA custodians usually charge higher fees than the mass-market IRA providers. It’s common to have an annual account fee (a few hundred dollars), plus an investment processing fee ($30-$50) per investment.
Your SDIRA custodian must sign the syndication paperwork for each deal you invest in. It’s important to know their process and timelines for this, especially if you’re trying to move quickly on a deal. If you’re trying to invest in a “hot” deal, the deal could fill up before you can get all the docs signed.
Watch out for potential tax consequences, specifically the Unrelated Business Income Tax (UBIT) and Unrelated Debt-Financed Income (UDFI). This is a much longer topic, but the short version is that if you invest in a debt-financed real estate deal (and most RE deals use debt) through your SDIRA, you could potentially owe taxes on income received from the deal. The amounts are usually not huge, but it’s something to be aware of. Talk with the deal sponsor and your CPA to get an idea if the deal you’re looking at might trigger UBIT and/or UDFI.
Unlocking retirement funds can be a great way to put underperforming capital to work in a syndication. If you’d like to explore this idea further to see if it makes sense for you, schedule a call with me and we can talk through the process and your specific situation.