CFP or CPA

[Kevin S.]

Hi BP members,

I want to use my 401K for REI. I looked into SDIRA but prefer to do a Roth conversion (pay taxes) and then invest in RE within the Roth. I am able to withdraw without penalty.

Has any BP members done that?  Can use advise as to how it was done.  

I assume I need a CFP first to figure out the Roth conversion part and once converted then in comes CPA?  Do I just need CPA?

Appreciate all help.  Thanks.

[Kirk M.]

Hi there,

I have not done what you are trying. However, I'm familiar with CFP designation and they are mostly educated in investing in equity markets. I'm sure there are some that have knowledge about the RE markets. Your question is very specific and I recommend seeking a CPA that specializes and actually invests their own assets in RE themselves to assist you. They can estimate any taxes assessed before making long term decisions. Right now the stock market is in a short term decline and not sure what investments you currently hold in the 401K and how to time the market would be a better question for an FA (Financial Advisor). CFP is good but, there are so many great FA's that can assist you as well. Advice from both may be needed but, a CPA first to see the tax liabilities.

Do keep in mind that a $10,000 investment in Apple in the 1980's would be worth about $15M today.

https://www.fool.com/investing/2022/10/12/invested-10000-in-...

Some real estate investments grow a little slower and even though there is monthly rents collected, there is deferred maintenance costs and management requirements depending on what type of properties. Unless you are planning a DST (not sure if SDIRA's can hold this type of investment) which is similar to high rate bond investing depending on the rate of returns.

Please seek the advice of professionals and best of luck with your investments. 

Maybe some CPA's on BP will see your post and chime in. They may even work with FA's or CFP's to build the team you need for this transition of retirement assets. GL

[Brett Synicky]

Quote from @Kevin S.:

Hi BP members,

I want to use my 401K for REI. I looked into SDIRA but prefer to do a Roth conversion (pay taxes) and then invest in RE within the Roth. I am able to withdraw without penalty.

Has any BP members done that?  Can use advise as to how it was done.  

I assume I need a CFP first to figure out the Roth conversion part and once converted then in comes CPA?  Do I just need CPA?

Appreciate all help.  Thanks.

 Hi Kevin this is not an uncommon method of investing.  Many people have invested in RE within a pre-tax and Roth account.  You can do this with a Solo 401(k) or SDIRA.  Both have the Roth option.  401k has Roth built in, SDIRA is either pre-tax or Roth.   Or both but either way, separate plans. It's a good idea to work with a CPA who understands self Directed Retirement accounts and I definitely recommend you check with a CPA before you do a Roth Conversion so you know the tax implications.  It's definitely not a terrible idea to pay taxes on the seed versus the harvest, assuming you can afford that.  You can do all at once or chunk it over several years or whatever amounts and timeline makes sense for you.  Additionally there are plans that give you checkbook control and plans where you need to go through the custodian for all transactions.   

You can learn more about Checkbook IRA here: https://www.biggerpockets.com/member-blogs/2810/blog_posts/2...

[Kevin S.]

@Kirk M.

Thanks for your input. I am no longer in accumulation phase of my life so not looking for another Apple as I won't be around for the 15M. Now if I know another APPLE, will not hesitate to buy for my kids. My plan is to move funds in Roth IRA and buy RE so all income/profits will be tax free (if I am not mistaken). This of course take planning to do Roth conversion and require professionals well versed in this matter. Just not sure who comes first, CFP or CPA or just one.

[Kevin S.]

Quote from @Brett Synicky:

Quote from @Kevin S.:

Hi BP members,

I want to use my 401K for REI. I looked into SDIRA but prefer to do a Roth conversion (pay taxes) and then invest in RE within the Roth. I am able to withdraw without penalty.

Has any BP members done that?  Can use advise as to how it was done.  

I assume I need a CFP first to figure out the Roth conversion part and once converted then in comes CPA?  Do I just need CPA?

Appreciate all help.  Thanks.

 Hi Kevin this is not an uncommon method of investing.  Many people have invested in RE within a pre-tax and Roth account.  You can do this with a Solo 401(k) or SDIRA.  Both have the Roth option.  401k has Roth built in, SDIRA is either pre-tax or Roth.   Or both but either way, separate plans. It's a good idea to work with a CPA who understands self Directed Retirement accounts and I definitely recommend you check with a CPA before you do a Roth Conversion so you know the tax implications.  You can do all at once or chunk it over several years or whatever amounts and timeline makes sense for you.  Additionally there are plans that give you checkbook control and plans where you need to go through the custodian for all transactions.   

You can learn more about Checkbook IRA here: https://www.biggerpockets.com/member-blogs/2810/blog_posts/2...

 Thank you Brett.  So I can skip a CFP?  Just CPA can walk me thru from start to finish?

[Brett Synicky]

@Kevin S. I sent you a DM with more info.  I'm never going to dissuade somebody from doing their due diligence from talking with professionals but I would say you don't need a CFP.  Most CPA's will not set up the plan documents for you to self direct a retirement account.  There are full custodial plans and checkbook plans as I mentioned and either of these can be set up with companies that act as plan document provider.   Check the link I put in the first comment for more info.  

[Basit Siddiqi]

A CPA can advise you on what the tax implications would be on a retirement account withdrawal.

The CFP can discuss with you what to do with the funds once they are taken out.

[Kevin S.]

Quote from @Basit Siddiqi:

A CPA can advise you on what the tax implications would be on a retirement account withdrawal.

The CFP can discuss with you what to do with the funds once they are taken out.

Thanks for confirming that. Who help with the actual process of setting up the Roth IRA account and the nitty gritty of it? Are these specialized companies/businesses/custodians/individuals?

[Fulton Abraham Sanchez]

Quote from @Kevin S.:

Hi BP members,

I want to use my 401K for REI. I looked into SDIRA but prefer to do a Roth conversion (pay taxes) and then invest in RE within the Roth. I am able to withdraw without penalty.

Has any BP members done that?  Can use advise as to how it was done.  

I assume I need a CFP first to figure out the Roth conversion part and once converted then in comes CPA?  Do I just need CPA?

Appreciate all help.  Thanks.

CPA will be ok to calculate taxes and pay for conversion. I have a client who did that but with SDRA without conversion. The only thing is by 72 and half years old you will need minimum distribution taken and pay taxes then.

[Edward Condon]

@Kevin S.
You don't mention your age. But, if you are younger than 59 1/2, you could get whacked with a 10% tax penalty on the amount of the withdrawal.  Assuming you are not subject to penalties, do your analysis in after-tax dollars. (i.e. $500k becomes $350k and throws off taxable NOI, etc.) I strongly suspect your best move is to roll the TSP to a Traditional IRA and convert the IRA to a Roth, using non-retirement dollars to pay the income tax, even if you have to borrow the tax liability. Invest the Roth in a diversified pool of high-quality notes. (Do not buy actual real estate with IRA dollars!) Feel free to dm me. I'll show you concrete examples.

Real estate is inherently tax-efficient.  Use your least tax-efficient money to buy your most tax-efficient assets.  Use your most tax-efficient money (IRAs, etc.) to buy your least tax-efficient assets (notes, etc.).  Proper asset location is a non-trivial consideration!  Again, feel free to dm me.

[Brett Synicky]

@Edward Condon transferring a qualified account to another qualified retirement account is not considered a distribution and is therefore not subject to tax or penalty. I think it makes sense to real estate inside and outside of retirement accounts.   The purpose of investing in real estate with your self directed retirement account is to increase the value of the retirement account, there are no taxes of Roth or deferred if pre-tax.   So depreciation, 1031’s etc are not part of the conversation.  So buy inside and outside.   Inside a retirement account, you still get all the appreciation and rental income that adds up massively over years and the returns are usually well over double digits.   I think doing this in a Roth is the most powerful way to do it paying tax on the seed instead of the harvest.  

[Kevin S.]

Quote from @Fulton Abraham Sanchez:

Quote from @Kevin S.:

Hi BP members,

I want to use my 401K for REI. I looked into SDIRA but prefer to do a Roth conversion (pay taxes) and then invest in RE within the Roth. I am able to withdraw without penalty.

Has any BP members done that?  Can use advise as to how it was done.  

I assume I need a CFP first to figure out the Roth conversion part and once converted then in comes CPA?  Do I just need CPA?

Appreciate all help.  Thanks.

CPA will be ok to calculate taxes and pay for conversion. I have a client who did that but with SDRA without conversion. The only thing is by 72 and half years old you will need minimum distribution taken and pay taxes then.

Is there any advantage of doing with SDIRA vs paying the tax now and invest under Roth IRA? As a CPA are you aware of any reason or tax benefit of the SDIRA route?

[Kevin S.]

Quote from @Edward Condon:

@Kevin S.
You don't mention your age. But, if you are younger than 59 1/2, you could get whacked with a 10% tax penalty on the amount of the withdrawal.  Assuming you are not subject to penalties, do your analysis in after-tax dollars. (i.e. $500k becomes $350k and throws off taxable NOI, etc.) I strongly suspect your best move is to roll the TSP to a Traditional IRA and convert the IRA to a Roth, using non-retirement dollars to pay the income tax, even if you have to borrow the tax liability. Invest the Roth in a diversified pool of high-quality notes. (Do not buy actual real estate with IRA dollars!) Feel free to dm me. I'll show you concrete examples.

Real estate is inherently tax-efficient.  Use your least tax-efficient money to buy your most tax-efficient assets.  Use your most tax-efficient money (IRAs, etc.) to buy your least tax-efficient assets (notes, etc.).  Proper asset location is a non-trivial consideration!  Again, feel free to dm me.

 My post did mention I am able to withdraw without penalty.  I believe in January 2026, the 2017 tax cut will sunset and tax rate goes back to pre-2017.  I need to withdraw as much as I can in next 2 years within my tax bracket.  This is also for those who might be in my shoes.  I'll DM you.  Thanks.

[Kevin S.]

@Edward Condon

BTW, why use most tax efficient money to buy least tax efficient assets?  Regardless of what money I would think you always buy tax efficient assets???  

[Kevin S.]

Quote from @Brett Synicky:

@Edward Condon transferring a qualified account to another qualified retirement account is not considered a distribution and is therefore not subject to tax or penalty. I think it makes sense to real estate inside and outside of retirement accounts.   The purpose of investing in real estate with your self directed retirement account is to increase the value of the retirement account, there are no taxes of Roth or deferred if pre-tax.   So depreciation, 1031’s etc are not part of the conversation.  So buy inside and outside.   Inside a retirement account, you still get all the appreciation and rental income that adds up massively over years and the returns are usually well over double digits.   I think doing this in a Roth is the most powerful way to do it paying tax on the seed instead of the harvest.  

 If you believe in paying tax on the seed instead of harvest why buy real estate inside  retirement account?  Why not all outside?  That was my the basis of my original question, to move out of tax deferred account and into Roth.  

[Edward Condon]

Quote from @Kevin S.:

@Edward Condon

BTW, why use most tax efficient money to buy least tax efficient assets?  Regardless of what money I would think you always buy tax efficient assets???  

It is just a "portfolio approach". If you assume that you have various "buckets" (i.e. taxable, tax-deferred & tax-free) and differing objectives (i.e. growth, income, liquidity), paying attention to proper "asset location" will add to your net, net after-tax bottomline. In your taxable bucket, all capital gains taxes are optional. But, all IRAs have to get emptied. A Traditional IRA will convert what should have been an optional gain taxed at cap gains rates into a mandatory tax at ordinary income tax rates. Also, with a Traditional IRA you have to make dang sure you have sufficient liquidity to take your RMDs!

[Fulton Abraham Sanchez]

Quote from @Kevin S.:

Quote from @Fulton Abraham Sanchez:

Quote from @Kevin S.:

Hi BP members,

I want to use my 401K for REI. I looked into SDIRA but prefer to do a Roth conversion (pay taxes) and then invest in RE within the Roth. I am able to withdraw without penalty.

Has any BP members done that?  Can use advise as to how it was done.  

I assume I need a CFP first to figure out the Roth conversion part and once converted then in comes CPA?  Do I just need CPA?

Appreciate all help.  Thanks.

CPA will be ok to calculate taxes and pay for conversion. I have a client who did that but with SDRA without conversion. The only thing is by 72 and half years old you will need minimum distribution taken and pay taxes then.

Is there any advantage of doing with SDIRA vs paying the tax now and invest under Roth IRA? As a CPA are you aware of any reason or tax benefit of the SDIRA route?

@Kevin S., hi. It's the delay of tax payments only.

[Brett Synicky]

Quote from @Kevin S.:

Quote from @Brett Synicky:

@Edward Condon transferring a qualified account to another qualified retirement account is not considered a distribution and is therefore not subject to tax or penalty. I think it makes sense to real estate inside and outside of retirement accounts.   The purpose of investing in real estate with your self directed retirement account is to increase the value of the retirement account, there are no taxes of Roth or deferred if pre-tax.   So depreciation, 1031’s etc are not part of the conversation.  So buy inside and outside.   Inside a retirement account, you still get all the appreciation and rental income that adds up massively over years and the returns are usually well over double digits.   I think doing this in a Roth is the most powerful way to do it paying tax on the seed instead of the harvest.  

 If you believe in paying tax on the seed instead of harvest why buy real estate inside  retirement account?  Why not all outside?  That was my the basis of my original question, to move out of tax deferred account and into Roth.  

I don't understand your question:   "If you believe in paying tax on the seed instead of harvest why buy real estate inside retirement account? Why not all outside?"

I'm not sure we're in disagreement here. But just in case let's clarify pre tax vs. Roth. With a traditional IRA/401(k) the contributions are made with pre-taxed funds. With a Roth the contributions are made on already taxed funds. On the distributions after 59 1/2 or 59 1/2 plus 5 years after the date of the first contribution made to the Roth you will either pay taxes or you won't. Since the Roth allows the money to grow tax free, I believe it makes sense to maximize Roth contributions and gains as much as possible over and above pre tax retirement accounts.

If you sell an investment home outside a retirement account you're going to pay capital gains and depreciation recapture if you depreciated. This is not so in an IRA (income tax paid at distribution) or A Roth. All gains in the Roth are tax FREE. No 1031 needed to defer taxes.

As I said, I think it can make sense to buy and hold real estate personally AND inside retirement accounts.  The Roth puts the whole thing on steroids since no taxes (state or fed) on the withdrawal.  Furthermore there are no RMD's with a Roth.   So IF you can take the tax hit when you convert a pre tax account to a Roth, I say go for it.   I hope this is helpful.  

BTW, I'm not a CPA or CFP.  Do your own homework on this.  

[Kevin S.]

@Brett Synicky

We are now on the same page.  I am able to withdraw without penalty.  I have a good portfolio in non retirement account and even larger in pre-tax portfolio.  If I don't start taking it out now it may grow to a point that will put me in a tax bracket I was hoping I won't be when I am retired.  So I plan to take the hit now and convert to Roth next few years.

Now I just need to talk to someone who has done it and help me walk the path.  Any BP member investor.

Next best person is CPA, as I gather from responses here.  But still need help with the whole Roth conversion thing, setting up account and investing within the Roth etc etc.

Thanks for your response, Brett.

[Brett Synicky]

@Kevin S. 

Sent you another DM