Types of Retirement Accounts & Their Different Tax Advantages (Solo vs. Combined, Multi-Member etc.)

Hello, David Moore with IRA Advantage, iraadvantage.com. And we’re going to talk a little bit about taxes and retirement accounts today. If you bounce back and forth between our YouTube channels, you can take to look at Equity Advantage 1031 exchanges, and there’s some videos on basis and gain. We actually just shot a quick video talking about phantom gains, which is one of those ugly things that sneaks up on you if you lost a property foreclosure short sale, and it’s not a pretty thing.

But when we’re talking about retirement accounts and buying real estate, one of the big objections people have is, “Well, why would you go out buy real estate with an IRA or 401k when you’re losing the long-term capital gains tax consequence of such an investment?” Well, that’s true, but there’s nothing you’re going to buy with a retirement account that it gives you that long-term capital gains tax treatment.

Anything you own in a retirement account is going to be taxed at normal income tax rates on disposition. Now, you might say, “Well, gee, I’ve got a Roth IRA.” Well, that’s a different deal. Roth IRA is tax money that’s going to grow tax free, where a traditional IRA or 401k is pre-tax money growing tax deferred. So I’m going say this again with respect to the taxation of something and your ability to go out and buy real estate with your retirement account, there’s really no reason you shouldn’t do it. Self-directed retirement accounts are all about diversification. Any financial advisor is going to tell you the best recipes of success is diversification, so why wouldn’t you take some of the money and go out buy these things?

Now, if you’re asking or making a statement that you should only buy real estate one way or another, it’s not a question diversification, you’re just saying, “Hey, I can only buy real estate one way with money out of my pocket or money out of the retirement account.” I’m going to tell you, “Pull it out of your pocket,” for a variety of reasons, but that’s not what we’re talking about. The simple statement of, “Well, don’t buy real estate with your IRA because of the loss of long-term capital gains,” it doesn’t mean anything. Alright? No matter what you buy with a retirement account, I’m going to say it again, no matter what you buy with a retirement account, it’s going to be taxed the same way. And you pay tax on distributions, you’re not paying tax on these things during the life of the investments. And that’s something I’d like to stress because our sister company, Equity Advantage, handles tax money, and then it’s all about tax deferral using 1031.

So we’re in a world of basis and gain when we’ve got money out of our pocket. When we’re looking at a retirement account, we’re not looking at basis and gain, we’re strictly looking at what’s in that account and you’re paying tax on that money as it comes out. Now it’s not to say that you couldn’t have tax exposure in a couple of different instances, for example, if you use an IRA and go out buy a property 50% loan-to-value, the income and gain attributable, that loan, that other 50%, other people’s money, that’s going to trigger tax exposure. Even with a Roth IRA, it’s going to trigger tax exposure.

One of the reasons I like 401k plans for people we can use them for is a leveraged investment in real estate. With a 401k plan, you don’t have tax exposure, you do have tax on leverage with IRAs, even with a Roth IRA. So when we’re looking at the tax ability of a retirement account, doesn’t matter what you buy, it’s going to have the same tax treatment with the exception of if you’ve got a leveraged property, you’re going to have some exposure on that debt-financed income or debt-financed gain, DFI or DFG. So I hope that has helped a little bit. And please don’t hesitate to reach out with any further questions on this topic. David Moore, IRA Advantage, iraadvantage.com. Thank you. Bye-bye.