Hello BP Community,
Not a visit goes by where I don't learn something new. I recently completed a rehab on a SFR thru my LLC using a loan from a private lender for the purchase, and funded the remodel using a HELOC on my primary residence.
Since doing some reading here, it appears I can use better options in the future.
I have a question that I haven’t seen posted, so far.
- Can funds from a self-directed IRA AND a solo 401k be used on the same property? i.e., purchase a property using the IRA and remodel using the solo 401k?
After leaving my last job, I set up a self-directed IRA and moved my old 401k to it.
I still have funds in that company’s defined benefits plan that I believe will be best used by moving to a Solo 401k (I understand the rule of being able to use a max of 50% or $50k, whichever is less. Other than that, I’m still coming up to speed on the solo…much to learn).
Thanks in advance.
While you can joint venture between a self-directed IRA and a Solo 401k, I don't think you would need to do so, and it sounds as if you may be mis-understanding the Solo 401k.
If you are self-employed and have no full time employees, there may be advantages to a Solo 401k. There also may not be advantages as compared to your self-directed IRA, depending on your situation and goals.
Either way, you can likely consolidate the existing SDIRA and new rollover funds into either the existing IRA or a new Solo 401k. The exception would be if the current IRA is a Roth IRA.
Also, there is a difference between investing with a Solo 401k, in which case it is the Solo 401k purchasing property and all funds would be availbale - and borrowing personally from the 401(K), which you are describing above with the $50K/50% limit. If you were to personally borrow from your 401k, you could not combine that money with an IRA on a project as that would be self-dealing.
I'm not sure where/how you setup your IRA, but if the firm you are working with cannot easily navigate you through what I have described above (which unfortunately, may be the case), then you might want to look for an alternative provider.
While not necessarily the best option, If it is important to you to participate in both a self-directed IRA and a solo 401(k), then you could set up an LLC and pool (invest) both the IRA and the solo 401(k) funds in the LLC. The LLC would then be invest in real estate. Again, this is not necessarily the best option, however.
For example, some drawbacks is the $800 franchise fee that applies to LLCs in California, and the LLC would be considered a partnership so a federal tax return (Form 1065) will need to be filed for the LLC as well as a K-1 for each member of the LLC (the IRA and the solo 401k plan).
Hi Brian and Mark, thank you both for your responses.
Let me address Brian’s response first.
I think you’re right, it appears I may be missing the finer details.
You brought up a key point that caught my eye. So, just to confirm, when investing, the entire amount in the S401k is available and borrowing invokes the 50%/50k rule?
Which leads me to ask, if my goal is to build my SDIRA/S401k balances through real estate, and maybe take an occasional distribution, can you give me an example when it would it be prudent to “borrow”?
And just for fyi, my LLC is a single member entity, no employees other than myself.SDIRA is not a Roth.
I find my real estate investing is more efficient by focusing more on the projects and not so much the financial administration side of things. I tend to like things streamlined.
So, that said, my SDIRA custodian mentioned that they basically hold the checkbook and all payments are made by them, at my direction; ok when purchasing property, not so convenient when paying the trades.
If my business model is buy property to mainly flip, and have the convenience of paying bills as needed, it seems I should look further into the S401k since it appears I can run my business all from that?
Mark, thanks for your response.
I think my mistaken understanding regarding the limits of the S401k made me think the 2 funds were somehow necessary.
Regarding the LLC, my understanding is that most non-recourse lenders lend to LLCs and not individuals. My LLC is a standalone (not associated to my SDIRA) and my CPA filed my last returns under a Schedule C; if I associate a Solo 401k to an LLC, does this now make it a partnership (subject to Form 1065)?
Thanks Brian and Mark, a bit wordy, but appreciate your patience and feedback!
Your LLC could sponsor a Solo 401k.
This would allow you to take income you generate from flipping personally with your LLC and make new contributions to the Solo 401k, thereby reducing taxes on your personal flipping LLC.
The Solo 401k could accept a rollover from your current IRA and/or the other IRA you mentioned you have. You now have one pool of self-directed funds that can be invested with checkbook control.
The Solo 401k cannot invest alongside you personally or your LLC - that would create self-dealing issues.
The Solo 401k could flip houses, but you would need to hire contractors and remain at arm's length. When a Solo 401k or IRA flips houses regularly, this incurs a trust tax known as UBIT - which is basically there to keep tax-exempt entities from driving taxpaying businesses out of business. Flipping is a business, whereas lending and holding rentals are not, and would not have exposure to UBIT.
The 401k loan is an emergency safety valve, or a means to tap a little capital to grow a business you may operate personally when other forms of credit may not be available. A lot of folks promote the 401k loan like it is cheap and easy money. It is not. You give up the initial tax sheltering on the borrowed funds, which were originally contributed pre-tax, but will be replaced with post-tax dollars when you repay the loan.
Yes, all of the Solo 401k funds are available when doing a direct investment of the plan as opposed to borrowing. As for the convenience of paying investment related expenses, the Solo 401k could have checkbook control built in without the need for an additional LLC owned by the retirement account. That is not the case with the self-directed IRA which needs an IRA-owned LLC in order to give you the convenience of checkbook control.
Brian gave you some great responses. I will just add that one can partner with his plan in some instances, but because it does involve risk, will limit your flexibility with the investment, and can be prohibited depending on the circumstances of the partnering, it is generally not recommended.
Thanks for the info. Good to know my existing LLC can sponsor a Solo 401k. The single pool of self-directed funds with checkbook control seems to better fit in with my goals.
Thanks for your response. As all of you have pointed out, not needing a new LLC for the Solo 401k is a huge takeaway. In past research, I was under the impression it was a requirement to do business with a new Solo 401k, or at least of some benefit. And there is that point about not having to pay the $800 fee for the privilege of starting up and owning an LLC here in CA.
Thanks very much for clearing up the murky waters. Your responses really shortened the path to what I needed to know. My next step is to sit down with my CPA and ask him to back-fill into this discussion. Thanks, and prosperous investing to you.
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