After browsing and reading BP I still don't a clear idea which route to go. In my situation, my wife will be a retired teacher by June 1ST @ 52. She has 403b and 401a plans which she can rollover from VALIC and STRS.
We would like to rehab RE to rent and/or flip whatever the property and the market dictates. At the same time GENERATE income. We would like to use part of the money for RE investment while the rest rolled over in mutual funds.
My understanding and partial summation of the pros and cons and please CORRECT me if I'm WORNG:
- Solo 401 cheaper to set up ($500-$800) and maintain ($100-$200 annually) vs. 4K -5K and 1K+.
- Solo distributions under 59 1/2 years subject to 10% penalty + income tax. ROBS salary distributions/salary are tax deductible.
- ROBS not a good idea to rehab and rent since it generates a passive income which is an additional 20% tax. Solo is good to hold and shelter up to 59K/ year.
While trying to sort out everything to figure the better direction, does the Solo 10% penalty + income tax outweigh the headache of ROBS, Corp C, taxation, annual testing and maintenance?
I've been an entrepreneur since college without having any full time employees and don't anticipate on starting now. However, RE is new to me and I'm glad I found BP.
Thanks in advance.
Your assumptions seem to be mostly correct. Unfortunately, the tax code does not provide a middle ground where you can have tax sheltered passive income AND benefit personally with current income.
The ROBS plan is not well suited to passive holdings, though if you have a portion of the overall C Corp holdings in passive assets that is OK. This is really a program for creating an operating business. In real estate terms that would be an active real estate development and/or construction company.
If you have enough capital, or can start with flips and really get things rolling, the profit sharing plan at the back end of the ROBS structure can be used to hold shares of the operating business and separately hold passive, tax sheltered real estate rentals, as opposed to holding passive income properties via the C corp.
Sounds like you're the IRA guy - good to know since I do a lot with SDIRA buyers and unfortunately I'm not quite there on being the know-it-all I'd like to be....
Might be a long answer, but I'm interested to know - between SDIRA or 401k when doing either rehabs, or turnkeys, or just flips - in general, is one better than the other? Or - are there too many factors to make that kind of generalization?
A generalization would be just that.
The determining factors we look at when speaking with an investor and helping them select a plan are their employment/self-employment status today and for the long term, investment goals, funding mix, etc.
Both the SDIRA and Solo 401k are capable of making the investments you note. A 401k has one advantage in that is is not subject to UDFI taxation when leverage such as a mortgage is used, but that would not be a reason to shoehorn someone who is not really a good fit for the SoloK into such a plan. The impact of UDFI on an IRA borrower holding a rental is pretty minimal.
The bottom line is that every investor is unique and one-size-fits-all solutions are going to fall short.
@Brian Eastman thanks!!!
Originally posted by @Blair Poelman :
I'm interested to know - between SDIRA or 401k when doing either rehabs, or turnkeys, or just flips - in general, is one better than the other? Or - are there too many factors to make that kind of generalization?
Blair, while both IRA and Solo 401k can be self-directed they are two different plans. Almost anyone who has earned income or some type of retirement account can setup SD IRA and fund it using that account or make new contribution. Solo 401k however is designed for those who are self-employed or own a small business without full time common law employees.
But if you qualify for a Solo 401k usually this will be a better choice for number of reasons:
- eliminate custodian and transaction based fees
- checkbook control
- exempt from UDFI tax on leveraged real estate
- ability to borrow from your account via participant loan feature
- significantly higher contributions limits (up to $59K/yr)
- tax-free investing using Roth-subaccount
But I agree with Brian that to determine what would be best in your particular situation you should speak with the expert about the specifics of your situation.
How about a more realistic scenario on a 75K RE:
1. Didn't sell after 3 months and decided to rent it @ 1K monthly for a year.
2. Flip it with 20K profit within 2 months.
How much taxes will be paid in both Solo 401 and ROBS if income/distribution to be generated?
The following IRS websites discuss the ROBS 401k/PSP (rollover as business startup).
@Mark Nolan The provided information is a general IRS guidelines and I appreciate your input. My comparison is whether the red tape and expenses of ROBS with no employees is worth it vs. Solo 401K income distribution given my above example.
Adam I buy renovate and sell a larger volume of homes. All of these guys above know wht they are doing. Many of my clients are in your position. Jim Hitt with American IRA manages over 300,000,000.00 in funds. He has helped my friends and clients. Google American IRA.
If you need real estate advice I can help you there. My clients can make 10% to 20% returns as they are mentored by me through the process.
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