Withdrawing Retirement Funds

Withdrawals from pre-tax retirement accounts are taxable at your applicable tax rate for the year of withdrawal. Strategies for limiting the tax impact include timing your withdrawal for a year of decreased income (i.e., employment termination or retirement), and limiting withdrawals to stay within a comfortable tax bracket.

Withdrawals from ROTH accounts may be taxable, tax-free, or partially taxable depending on the type of account and your basis in the account. Keep records of conversions, contributions, and withdrawals for basis calculation.

Early withdrawal penalties of 10% may apply for both pre-tax and ROTH withdrawals; however, for community property states you may be able to avoid the 10% penalty using a QDRO exemption with the services of an attorney. Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Investing through an IRA/401k

Investing through an IRA has its pros and cons. More recently it has incurred less favor among investors and lead syndicators. Partnership tax prep is more complicated with IRA partners and many leads consider IRA investors less desirable, if even acceptable. Complicated tax returns (990-T form) must be filed for IRAs that have income from debt-leveraged assets, and fewer tax firms are willing to file those returns due to UDFI complexities.

However, 401k retirement accounts are not subject to UDFI and therefore do not have a tax filing requirement. Few tax payers are eligible for a self-directed 401k. Those that are eligible can take advantage of exponential growth of real estate investing within the tax-free Roth vehicle and avoid taxation of future growth and distributions. For your business to sponsor a self-directed 401k, you must have a legitimate self-employed business (not rental real estate) and have no full-time employees.