Nonqualified Real Estate Retirement Plans
If you’re in the field of commercial property management, you might own an apartment building or two. You might have a retirement plan separate from your investment, and it is probably a qualified retirement plan.
Qualified retirement plans are the IRS’s answer to the people’s complaints. The employer contributes to the retirement plan now and the employee pays taxes now, or the employer contributes to the plan at some later date and the employee pays taxes at some later date; this is how it was previously. The IRS then came out with qualified retirement plans which allow the employer to contribute to the plan now, but the employee can delay paying taxes until some future date.
In exchange for these generous tax rules, the IRS imposes strict restrictions. Certain nondiscriminatory rules must be followed as well as a number of other rules.
All in all, these rules end up being very restrictive, effectively “sanitizing” the plan; they make the plan not really that good, but not really that bad either.
Non-qualified plans are often more generous but are subject to more strict tax rules, but not always. Non-qualified plans are a broad category. Essentially, they are not a category, they are simply everything other than qualified plans.
Now, let’s make our own non-qualified plan. We’re looking for four main things:
– Tax advantageous
– Adequate rate of return
Liquidity is important because you may need to access your funds in time of great financial danger. Although Douglas R. Andrew touts this as a critical factor in his book Missed Fortune 101, we tend to side with the idea that liquidity, or marketability, is second in importance to the other three factors.
We assume that anyone who will be investing will already have saved up emergency funds and has access to enough emergency credit to get by in event of an emergency.
Tax advantageous is obviously important because you want to keep as much money as possible.
Safety, again, is obviously important, because you don’t want to lose your money. The risk-reward curve is garbage. If an investment isn’t safe, then it isn’t an investment. It’s a gamble.
Adequate rate of return is arguably the most important. Without a good rate of return, what’s the point of investing? The goal is to make more money, isn’t it?
So, with this in mind, we are going to take the equity in our home, and put it in a universal life insurance policy all at once. This procedure must carefully be examined; you have to find a universal life policy with a good track record and who’s fees added to the home equity loan payment are less than the percentage usually made on that life insurance policy. Most policies will pay you far more than this. So, what you can do is take out loans on the policy, but only in the amount that the policy can afford. Since universal life often has a minimum guaranteed earnings credit (usually one percent), your money is safe, going to get a good rate of return, tax advantaged, and liquid. How does a qualified plan sound now?
Cody Scholberg is an expert author on real estate investment and commercial property management and writes at commercial property management guide.
OwnAmerica.com A lot of people think about buying investment property in places where they want to retire someday. But should you buy the unit you want to retire in? Or should you buy something else that has better investment fundamentals (like positive cash flow) and convert it to your dream retirement home later? Greg takes calls from two investors; one who did this wrong and one who has a chance to do it right.
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