Two Options for Passive & Active Investors

Wealth managers, CPAs and attorneys often ask me about using retirement accounts to buy investment real estate and business assets. This is something we have successfully done many times. It is a fantastic source of capital, but you need to know the complete array of options and rules in order to do it right. There is more than one way to do this and selecting the right option is critical. In this post I will briefly talk about the opportunities and pitfalls in two different options: self-directed retirement accounts for passive investments and the Rollover as Business Startup method known as ROBS, for active investments.

Individual Retirement Accounts (IRAs) and qualified plans such as 401(k)s or pension plans make up trillions of dollars nationally. It’s a huge bucket of money that can be tapped, especially with the Baby Boomer to Gen-X demographic exiting their ‘day jobs’ in droves, with generally the largest account balances and the ability to move these funds around.

People can use their retirement accounts to buy both ‘non-traditional’ passive investments such as real estate or loans and an operating business where they will be active and pay themselves, such as a franchise or business with a succession plan. Companies raising capital for real estate or corporate investments can also tap this market for passive individual investors.

It’s not really a surprise that there are a ton of rules that can really trip people up when it comes to these types of investments. Working with, or having at your disposal, a professional advisor that has an openness & certain level of creativity really helps. Wealth managers and CPAs might discourage this concept because it means less money for them to traditionally work with (aka ‘selling away’) or they often discourage this because they simply do not know about it and therefore it can’t be a good idea. My advice: Get quality guidance from good people up front who will help consider your short and long-term needs. Reach out to us and we will connect you to someone if you’re not sure who to talk to. If you ARE one of these professionals, we would love to hear from you as well!

Now the meat & potatoes in short format: Self-directed IRAs are great, but limited in certain critical ways. They are primarily for passive investments such as rental property or angel investment-type corporate investments where you are not active in the business. You can’t benefit from the investment personally, by law – only your retirement account can benefit. This means that cash flow must go back to the account and not into your pocket. People could give themselves brain damage trying to figure this one out. It is worth noting that these accounts include Solo 401(k)s, which is the same concept as the self-directed IRA, but actually a qualified plan like at a company for the self-employed (REALTORS® take note).

If you want to buy a business and operate it, or if you want to otherwise directly benefit from your retirement account investment at in the short term, you should look at the concept of Rollover as Business Startup (ROBS).

ROBS is an IRS-tested method to take a retirement account and use the funds as true business capital on a more active basis. Emphasis on ‘method’, as you are using a corporate structure and a new qualified plan to legally make the investment and there are firms specifically focused in this marketplace (usually law firms).  Start-up capital, growth capital, expansions or buying company real estate are all much more feasible through the ROBS system vs. self-directed IRAs. It does cost a lot more to establish these, but that will cover you appropriately moving forward, so it’s well worth it. There are many examples of successful investments, so please reach us to discuss some of these.

Companies raising capital from private investors should know this landscape. Some examples are: a real estate private equity company buying larger properties; a land developer building sub-divisions; a ‘rehabber/flipper’ of houses; a private rehab lender or a start-up or growth company offering private stock to individual investors. If you can get comfortable with it, especially the process, there is a lot of money out there for you. Literally, trillions of dollars.

While there are a lot of details involved, this is just a quick primer on two easily-accessible methods of using retirement accounts for investments outside of stocks, bonds, index funds or even REITS, depending on your objectives.  Give us a call and we’d be happy to share our knowledge with you.