What Can I Invest in With Only a Small Balance in My Retirement Account?

Author: Steven Miszkowicz
What small balance investors forget is the principal of “partnering with themselves”.
Let me give you an example: Your contact at a local bank knows you as an active real estate investor and calls to let you know that the bank has just repurchased a foreclosed property. The purpose of the call – do you have an interest in purchasing this property from the bank? After all, you are a known real estate investor and they want to move this property off their books quickly.
You agree to take a look and head out the door to complete your preliminary property inspection. It has been estimated that the property needs about $25,000 in repairs. The bank will let it go for their costs plus fees. You complete your inspection and market analysis and determine that the repairs could cost $18,000. The upside – your educated estimate tells you that after sale you can expect around $35,000 net profit.
Here is a perfect time to partner with your IRA/401k instead of just doing the deal on your own. Why?
This transaction has a healthy short term capital gains tax attached to that $35,000 profit. Partner with your IRA/401k and the portion purchased by the IRA/401(k) (or other self-directed retirement plan) remains untaxed. Could you also add your spouse and children’s Coverdell IRA’s? Yes. It would reduce the taxable gain even further!
Since you are putting personal assets into the transaction, your attorney may advise you to set up an LLC/LLP to protect your personal liability in the transactions. This does not change your plans and you would only have to make a slight modification.
Now, instead of you, your spouse and / or your children’s IRA’s investing directly, they will invest in shares in the newly formed LLC/LLP. Once funded, the LLC/LLP completes the real estate transaction. At the end of the year, assuming the property has been sold, a K-1 is issued to you, your spouse and all of the invested IRA’s.
There is no tax filing for the IRA’s so, in this example, the profits from the sale of the property will not become a taxable event until each of the IRA’s / self-directed retirement plans begin to take distributions. The tax consequences should also be minimized because the profits have been proportionately distributed among several retirement accounts.
Now, with principal and interest returned to your IRA/401(k) you are set to do your next deal. The big upside - you now have more cash available to work with on your next investment. The balances in the IRA accounts can continue to grow exponentially.
By partnering with yourself and others, you may find that a little investment can go a long way.
Steve Miszkowicz is the President & Managing Member of Chicago Trust Administration Services LLC
www.chicagotrustadministration.com

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