Apartment Syndicator · Charleston, SC · Member since 2016 · 973 posts · 728 votes
What have you done to make the most of your retirement accounts (401k, IRA, 403B, ESA, etc.)?
I recently converted an old 401k that wasn’t doing much for me into a self direct individual retirement account (commonly referred to as a SDIRA). I was unhappy with the 401k because I had limited ability to invest in anything other than mutual funds and then the market just goes up and down and sometimes there is nothing to show for it from a return perspective. I liquidated the 401k and transferred the entire balance to a sdira managed by a custodian to ensure I stay compliant with IRS rules. Personally I use equity trust company but there are many companies out there. Using the sdira I’ve been able to passively invest in multi family syndication deals and get the great benefits of real estate like cash flow and value add appreciation. I can’t invest in deals that I’m personally a GP of so it’s a way to diversify. Overall, I’m happy with the setup and performance of my sdira since I have complete control of what to invest in.
@Jamie Burns I'm probably going to get vilified in this thread for this. Why not just stack cash outside of the 401k and use that to invest in real estate? You mentioned that you already reduced your contributions to be exactly the employer match. Therefore, I'm assuming there's a spread between your previous percentage contributed to today's contribution percentage. I think it's a good idea to have both real estate and 401k assets to be diversified. I personally would never self direct to invest in real estate directly. I keep the 401k and real estate separate.
Thanks for posting guys! Wife has an old 401k I’ve been trying to find the best use for those funds and sounds like SDIRA w/ checkbook control is the way to go. BP for the win again
Correct, if you're not eligible for a Solo 401k, the IRA LLC is the way to go.
Guys - once you open a sdira or solo 401k, what funds are you using to invest in syndicates. Or does it actually allow you to invest in certain multi family projects for 6 months to a year similar to private financing? I ask because I already have a fidelity self directed 401k and want to see if these instruments you folks are talking about already exist there. Thanks
Guys - once you open a sdira or solo 401k, what funds are you using to invest in syndicates. Or does it actually allow you to invest in certain multi family projects for 6 months to a year similar to private financing? I ask because I already have a fidelity self directed 401k and want to see if these instruments you folks are talking about already exist there. Thanks
You cannot invest into real estate with a Fidelity Solo 401k, even if they call it "self-directed." You need a truly self-directed plan from a specialty provider to do that.
quick que i have 401k with my current employer through prudential there saying i cant transfer it over to an ira is this true wanna use money to invest in realestate
@Daniel Kelly it's likely that you can't roll. Being able to do an in-service rollover is not the norm. You may want to ask your employer for a copy of the plan docs if you want to double check. I have found that most HR employees don't know the docs inside and out. I've also found that most of the plan advisors who come to your employer offering to help don't know either. In-service roll overs are not a common question they get.
@Danny Randazzo we had a self directed IRA at equity Trust, they lost rent checks, rent checks bounced because it took 3 weeks for equity Trust to deposit the check we lost deals because equity trust couldn't get the earnest money check out fast enough.
We learned to hate equity trust and we don't hate anything but we learned the hate equity trust with a passion!
We transferred out to Advantageira.com none of the same problems and we're happy.
I suggest folks search on bigger pockets about the problems at equity trust!
In this case biggest did not mean better. Equity trust kicks $ to BP for being an advertiser.
Just withdraw it, pay the tax and penalty and put the funds to better use where you have control and access to it.
Convert it all at once or over a period of time. Tax rates are low and you have to pay the tax eventually if it is a pre tax account. The 10% penalty is not a big deal.
Thanks!
Mark:
I've had a CPA recently tell me the same thing...but I ask this: Can someone give feedback on the advantages of NOT cashing out a 401k and moving it instead into a Solo 401k? Are there any awesome better tax advantages in a solo 401k? Because the taxes will come, regardless, at some point....right?
@Naji Saba...I think it depends on what you want to invest in your solo 401k or SDIRA? If you want to invest in Notes or something that does not have a lot of tax advantages outside a qualified plan, then a Self Directed IRA makes sense.
However, if you want to invest in Physical Real Estate, then a self directed IRA does not make sense. There are so many tax advantages to physical real estate and getting a loan is easier when it is not in a SDIRA.
Be careful on what some of these SDIRA providers tell you...Again, I would never put physical real estate in a qualified plan.
@Jamie Burns I would recommend looking into a SoloK instead. It will take a little more work on the front end; however, it is much more advantageous if you are a believer in using leverage to build wealth. It also carries much less risk if you want to take advantage of features like checkbook control.
We opened a Solo 401K with checkbook control. Rolled over funds from other retirement accounts. Love the fact that I can invest passively through real estate instead of the stock market.
@Mark Welp I am in the process of converting an old 401k into a SoloK. I have talked to people who hold RE inside of a qualified plan and those who don’t. What tax advantages do you see to keeping actual properties outside of a retirement account vs holding them inside of one?
How is all the activity in the SDIRA and solo 401k reported to the IRS?
"All of the activity" in a self-directed IRA or 401k is not reported to the IRS. It's similar to not having to report every stock and or mutual fund investment in an IRA or 401k that is restricted to the market. The internal revenue code applies the same way whether the account is self-directed or not.
For a Solo 401k, you do have an annual reporting requirement if the plan assets are $250,000 or more. It's a fairly simple 2 page return on Form 5500-EZ. It's just informational and mostly deals with total asset value. The filing does not get into individual investments or transactions. The filing is not required at all for plans under $250k. Form 1099-R is generally filed for any distributions.
For an IRA LLC, you usually do an annual reporting to the IRA custodian so that they can file a similar form with the IRS for the IRA. Form 1099-R is used for IRA distributions as well.
With either structure, you don't have to report every investment or transaction to the IRS, but you will to keep a record of this activity for a number of reasons.
If you keep real estate outside a qualified plan, you can take advantage of depreciation (big item with the recent tax law change) and better leverage with a bank. You cannot take depreciation inside a qualified plan. Also, in your qualified plan you cannot use the cash flow until retirement age. The best part about real estate is using the cash flow now (while creating a tax loss through depreciation) and getting safe leverage on the real estate to use other people's money.
If 2 people both have a solo 401k is there anyway to partner on a property? Me and my partner are in the same boat. We both recently changed jobs. Our 401ks from our previous jobs are still in our old employers 401k. We were considering buying an investment property with the money but trying to figure out how to structure this deal. I already own long term rentals so I’m not new to investment properties. Just new to the sdira and solo 401k. What would be our best route?
@Mark Welp I figured you would go to the depreciation as I have heard that argument before and I would counter that the only advantage that depreciation has over a traditional qualified benefit plan is that taxes can be avoided completely by holding the asset(s) until death and passing the asset(s) to heirs; however, holding assets outside a QBP for depreciation is IMHO an inferior strategy to holding assets inside a ROTH QBP if one’s focus is wealth building for retirement.
Also, I personally believe cash flow is just as important inside a QBP as it is outside one. Inside a QBP cash flow builds liquid assets that can only be eroded by inflation and allows the portfolio to grow faster while building a foundation for a great retirement later. Outside a QBP cash flow allows one to buy financial freedom much earlier than allowed by traditional methods so I would argue that holding assets inside AND outside QBP’s is equally important but that the balance between the two should be based on your personal financial goals.
You would have some options as far as how to structure it. An LLC could be formed, the members of which would be the 2 Solo 401ks. A bank account could be opened for the LLC and funded by the 401k plans as capital contributions to the LLC.
Alternatively, the 2 Solo 401k plans could be tenants-in-common in the investment instead of forming an LLC.
Which way is best for your situation likely depends on a few factors and is usually a topic for discussion with qualified tax, legal, or investment advisors.
@Mark Welp could you explain further why you would not put SDIRA into RE, please sir and if you have an IRA, what's the best option for investing into physical RE? thanks .
Mark's argument is entirely legitimate, but also misses a key point.
Investing in real property with non-retirement money is great. OK. That does not make investing in real property with qualified tax-sheltered retirement funds a bad thing.
A lot of smart investors and tax professionals look at investing in real estate with an IRA and rightly notice that you cannot take advantage of benefits such as depreciation. This is because you are not paying taxes on the income in the first place. No taxes, no deductions.
Overall, it is difficult to analyze whether investing $100K of IRA money or $100K of after tax money into the same asset class will produce the same or greater net total spendable money in your pocket over time. There are a lot of variables.
However, and this is my key point here. The comparison does not matter for most investors.
What does matter is how to get the best possible results FOR YOUR IRA.
Real estate can be a great investment asset for a retirement plan, as it is a stable, physical asset with the potential to create income both through cash flow and maybe appreciation. You can employ the principals of leverage if you like and boost returns. If you are comfortable with rental property and feel you can put your retirement nest egg in a safe and productive place with real estate, then it is a good investment.
There are other also good alternative asset investments such as private lending, participating in syndicated apartment deals, private funds that focus on real property assets and lending, etc.
For a person with a lot of money and wishing to be truly diversified, then investing in direct ownership of real property with non-retirement money and putting the retirement plan into something else might make sense. For someone whose sole focus is how to get the best results for a specific amount of retirement money, real estate can be a good choice.
@Jamie Burns I'm probably going to get vilified in this thread for this. Why not just stack cash outside of the 401k and use that to invest in real estate? You mentioned that you already reduced your contributions to be exactly the employer match. Therefore, I'm assuming there's a spread between your previous percentage contributed to today's contribution percentage. I think it's a good idea to have both real estate and 401k assets to be diversified. I personally would never self direct to invest in real estate directly. I keep the 401k and real estate separate.
Heresy! Just kidding. I also like to keep them separate. I have real estate, a 401k and traditional and Roth IRAs. I view real estate as my "for now" money and the stocks as my "for later" money. I figure if I spread the funds out maybe if I close my eyes and swing hard enough I might actually hit something. :)