Best self-directed 401K/IRA - who do you recommend?

Question

What self directed 401K/IRA do you use?

Can you rollover a sep IRA into self directed?

Can you roll your W2 401k into self directed?

Anything to watch out for with this process?

Thank you!

George Blower · Answer

Please see the following regarding Solo 401k vs Self-directed IRA, Considerations re Investing in Real Estate & Consideratiosn re Choosing a Solo 401k provider:

Solo 401k vs Self-directed IRA:

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

• Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
• Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Considerations in Setting up a Solo 401k to invest in real estate:

1. First, you must be eligible to set up a Solo 401k. In order to be eligible, you must be self-employed (e.g. providing goods and/or services through your personal effort), reporting self-employment activity on your taxes (e.g. Schedule C if you a sole proprietor) & you do not have any w-2 employees working for your self-employed business or otherwise.

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. All of the income and expenses will need to flow in and out of the retirement account.

4. If you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira...

5. You can't live on the property or otherwise use it for personal use.

6. You can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. You must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. You should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Considerations in Choosing a Solo 401k Provider:

1. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

2. You may wish to confirm that the new 401k provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

3. You may wish to confirm that the new 401k provider will handle the ongoing compliance support such as any required 5500 filing (e.g. 5500-ez for a one-participant plan with assets in excess of $250,000), any required tax reporting (e.g. 1099-r in the event of a distribution or in-plan Roth conversion), mandatory plan updates and amendments, etc.

4. If you might take a 401k loan, you may wish to confirm that the new 401k provider will prepare the required 401k participant loan documents.

Scott Newton · Answer

I'm using iPlan Group as my Custodian Self-Directed IRA. I rolled over a large portion of my IRA from my employer (The portion I brought in from a previous employer years ago, that had grown to a sizable amount). Their fee structure is posted on their website and they came highly recommended.

If I were self-employed, I would use Dmitriy F and set up a Solo 401K.

Dmitriy Fomichenko · Answer

@Matt Bailey

Yes, you can rollover SEP (or any other IRA) into self-directed IRA.

401k from old employer can be rolled over easily as well, however, 401k with current employer typically can't be rolled over until you either reach retirement age or no longer employed there. There could be exceptions, contact your HR department or plan administrator and ask if you can do "in-service distribution".

Yes, you need to follow IRS rules. Specifically make sure you understand "Prohibited Transactions":https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions

It all boils down to this: all transactions involving your IRA/401k must be "arms length". You or any other "disqualified person" can't be involved in any transaction with the account, provide any services or benefit personally in any way, directly or indirectly.

Self-directed 401k has several advantages over an IRA (significantly higher contribution limit, checkbook control, ability to take personal loan from your account tax -free, Roth sub-account, cost-efficient and more) but it is not for everyone. You must have legitimate self-employment activity or business with earned income in order to qualify for it. If you are eligible, here is related discussion that you may find helpful:https://www.biggerpockets.com/forums/51/topics/527877-self-directed-solo-401k-for-real-estate-investors-q-and-a