Using 401(k) or IRA to Pay for Capital Improvements

The Employee Retirement Income Security Act (ERISA), which created the IRA in 1974, places surprisingly few restrictions on how retirement money can be invested. Except for life insurance or collectibles—such as artwork or coins—retirement funds can be placed in just about anything. Tens of thousands of investors have switched their retirement savings to self-directed accounts since the stock market correction of 2000 and 2001. By some estimates, 3% of the $3.5 trillion held in IRAs is now in alternative investments—and the number is growing.

THE GOOD NEWS:  A Self Directed 401k can be structured to conform to IRS Regulations, these regulations must be followed to the letter and ALL requirements must be satisfied to have a plan that is filly compliant.  Here are the four of the basic elements to the plan: 

Step One:  A fundamental requirement to this program is that a C Corporation must hold title to the real estate asset.  Therefore, if title is held in any other manner, the title can be transferred into a newly formed C Corporation. 

Step Two: The new C Corporation sponsors a new Self Directed 401k

Step Three: Retirement funds from existing IRA/401(k)’s are rolled into the newly formed 401(k)

Step Four: The new 401(k) purchases stock in the new C Corporation giving the Corporation the cash in needs to improve or expand the inn.  The new retirement account may purchase as much as 95% of the stock, providing the necessary capital for improvements; the new retirement account actually purchases the stock of a company you control, much as if your IRA or 401(k) were to purchase shares in a publicly traded company.   

In a nutshell, the new self directed retirement account purchases the stock a company you control, much as if your IRA/401k were to purchase shares in a publically traded company.  You avoid penalties and taxes on early withdrawals and eliminate the need to pay back principal and interest which ultimately increases the total debt that must be serviced. Why borrow the funds when you can invest in your retirement funds in an asset you control?

No one can guarantee the soundness of your investment strategy, as always, consulting with a qualified financial advisor is important.  You should be cautious before putting your entire nest egg into a new business; however, investors with a strong do-it-yourself streak and a compelling alternative investment strategy may want to consider joining the growing ranks of people who have decided to invest their retirement funds in themselves. 

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