Leverage Is Very Risky for Your IRA or 401k, but in THIS CASE… [EPISODE #243]

by | Mar 1, 2017

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Leverage Is Very Risky for Your IRA or 401k, but in THIS CASE… [EPISODE #243]

by | Mar 1, 2017

The Big Idea

Leverage can be dangerous in a self-directed 401(k) or IRA.  But there’s one type of situation where it can be the lesser of two evils, and may even be genuinely wise.

Points To Ponder

  • It is not prohibited for your self directed IRA or solo 401k to get a loan, as long as the loan meets certain parameters
  • Sometimes you already own high-quality but low-liquidity assets (like real estate), but you need large lump-sums of capital. For example:
    • Required minimum distributions
    • College expenses
  • A Wise Question: Is it smarter to risk taking a loss on the quick sale of an otherwise good asset, or is it smarter to get a low-LTV loan against one of those assets so you can continue to own it?
    • Do you think the asset will continue to of great value to your portfolio?
    • Does the asset produce sufficient cash flow to cover the debt payment?
  • Bottom line: Be very learn of getting a loan in your Self Directed IRA or 401k… but don’t assume it’s a bad idea every time


Full Transcript

I'm not a huge fan of using leverage in a retirement account.  But this time, it makes some sense.  I’m Bryan Ellis.  I’ll tell you about this special case right now in Episode #243 of Self Directed Investor Talk.


Hello Self Directed Investor Nation!  Welcome back to the podcast of record for savvy self-directed investors like you… where all we ask of you is 7 minutes a day… and in return, we give you MASTERY as a self-directed investor.

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Ok, here’s the deal:  I’m just not a big fan of using leverage in a retirement account.  By leverage, of course I mean getting a loan, usually to buy real estate.

It’s totally legal to do that in your IRA or 401k, you just have to make sure that the loan fits the right parameters.  Setting aside that issue, it’s really not a big issue anymore, as the number of IRA-compliant lenders is growing each year.

Having said that, I’m still just leary of leverage.  I’m a fan of the Dave Ramsey school of thought where debt is a bad idea period.  I actually don’t believe that, but frankly, that’s a mindset that will never steer you wrong.

But hey… sometimes, you do what you’ve got to do.

And one of those circumstances comes up for people who invest their IRA in real estate.

Actually, there are two situations.

One of them is this one:

You’ve done well, you’re in your retirement years, your account has about a million dollar’s worth of real estate in it, and that’s when you’re told you’ve got to pay out the dreaded RMD – required minimum distribution.  That’s the withdrawal the IRS forces you to take even if you don’t want it, just so that they can get some income taxes from you.

And with an account of that size, it’s totally plausible that a person in their 70’s will have an RMD of $40,000 to $50,000 per year.

Well what if you’re fully invested… maybe you own 3 or 4 properties and that’s all that’s in your account?

Well, you MUST pay the RMD… penalties for failure are rather severe… so I see 3 options here:

  1. You pay the money with cash on hand outside your retirement account
  2. You sell one of those properties to raise the cash, taking on the valuation discount that’ll likely be necessary if you have to do a quick sale to pay the RMD, or…
  3. You get a small loan in your IRA against one of the properties, and pay the RMD with that!

Now obviously this is contingent on whether your properties generate sufficient cash flow to cover the payments, but they certainly should.

A similar strategy might be useful for that kind of circumstance where you just need a large chunk of cash from your IRA or 401k, and the only way to get it would be to sell a property.  In that case, it might be worth getting an equity loan against the property instead if you believe there’s still upside in that property.

I’m thinking specifically about college expenses.  I’m 42 years old, and while I have one child in college and one who is a junior in high school, I also have one who is 3 years old and one who is 2 years old.  That means that right about the time I start to be able to withdraw money from my IRA, I could use that money to pay for college.  But I just can’t imagine actually SELLING real estate for that reason.  Rather, I can totally envision getting a low LTV loan against those properties so I can pay those large college lump sum expenses without actually giving up my properties.

So I’m still not a big fan of using leverage in IRA’s or 401k’s, but when the alternative is to likely take a guaranteed loss due to the necessity of a quick sale, or holding on to a great asset at the expense of the risk posed by low-LTV leverage, I have to say:  I’d have to seriously consider taking on leverage.

So what do you YOU think?  Sound off, my friends, on today’s show notes page at SDITalk.com/243.

My friends, invest wisely today, and live well forever!

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Bryan Ellis is host of Self Directed Investor Talk, America's #1 radio show and podcast for affluent self-directed investors.  He's also an expert in self-directed IRA's, solo 401k's and turnkey rental property investing... at least, that's what his wife tells him 🙂  He's a contributor to well-respected publications like TheStreet.com, Entrepreneur and ThinkRealty.  Bryan lives in metro Atlanta, Georgia with Carole Ellis - his wife, business partner and best friend - and his 4 children ranging in age from 2 to 19.