Switching to SDIRA, finding sponsors and getting into MF

32 Replies

I wanted to know your thoughts on this. I was thinking of moving close to $200k from an old 401k account into SDIRA. I’m not much familiar with SD custodians. Only one I know is Speciaized trust company. Do they vary a lot in structure or fees ? Are there any other reputable custodians that I should look at ? My main goal in doing this is to find a reputable sponsor to invest with solid long term returns. That brings to my next question, which is finding a good sponsor and MF investment with good returns. Do you guys recommend anyone in particular . I’m familiar with Matt Faircloth, Jake and Gino, Corey Peterson and few others.

I’m also looking to get into Jake/Gino’s coaching program. I have reached out to Corey Peterson to get into his boardroom but haven’t heard back yet. I have 100k in cash I plan to start with (I know it’s not much) to reach my goal of 4 to 5k/month in cash flow in next 2 to 3 years.

I use Quest Trust company. They do a good job. From looking around, it seemed like most company's fees were similar. Quest might be a bit on the high side. In hindsight, I wish I'd learned about Checkbook Control IRAs before going down the path. It's a good way to save on SDIRA fees.

On finding syndicators, there are many of us out here. Connect with folks and see who you like. There's no harm in building lots of relationships - in fact you'll be much better off if you do!

Wow, turn 100k into 4k to 5k per month in a few years?????

You have got to be kidding. 

Probably the first thing you need is the realization that you will get about a 10% to 20% return on a great investment, NOT 50-60k from 100k. Heavan forbid if a deal goes bad or has a lower than anticipated return.

$4,000 / month cash flow or $48,000 / year in 36 months with a starting basis of $100K.  

What could a person do?  Absent a large syndication deal, I think the answer is going to be flipping/trading in a high velocity environment where that money is turning over rapidly.  Here's an example of what I mean.

If you were to deploy that money in a hard money lending deals to skilled flippers, charging 5 points on the money and something like 10% interest, and it turned over every 90 days on average, then by month 36 you would be up to $238,000 capital, and then in months 37-39 the fees + interest would be about $16,500, divided by 3 = $5,500 / month income.

That scenario assumes every deal pays off as expected for 36 months, you (legally) avoid paying taxes on any of the profits, and you keep 100% of your money and all returns from that money deployed constantly.  That's a tall order.  It's also nothing close to being a passive return.  You didn't specify passive returns, but I figure that's probably your long term goal.  Might have to work hard for a few years to build up the capital you need to go truly passive.

If you were also the actual flipper, then perhaps you could get better returns turning your own money over, but the amount of work required would be orders of magnitude larger since you'd be managing crews as well.

@Manmath D.

If your money is coming from a 401k I would suggest that you find a way to open a self directed solo 401k or qrp instead to roll over to. You will avoid UDFI taxes on your future real estate investments.

The only reason I would open an SD ROTH IRA would be to roll over a ROTH IRA as it can not be rolled to a ROTH solo 401k.

@Manmath D.

Below are issues to consider as you evaluate this option including issues to consider in chooising a plan 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 full-time 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 full-time w-2 employees (i.e. working 1000 hours or more per year) working for your self-employed business or otherwise.

2. If you are self-employed with no full-time 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.

Originally posted by @Manmath D. :

I wanted to know your thoughts on this. I was thinking of moving close to $200k from an old 401k account into SDIRA. I’m not much familiar with SD custodians. Only one I know is Speciaized trust company. Do they vary a lot in structure or fees ? Are there any other reputable custodians that I should look at ? My main goal in doing this is to find a reputable sponsor to invest with solid long term returns. That brings to my next question, which is finding a good sponsor and MF investment with good returns. Do you guys recommend anyone in particular . I’m familiar with Matt Faircloth, Jake and Gino, Corey Peterson and few others.

I’m also looking to get into Jake/Gino’s coaching program. I have reached out to Corey Peterson to get into his boardroom but haven’t heard back yet. I have 100k in cash I plan to start with (I know it’s not much) to reach my goal of 4 to 5k/month in cash flow in next 2 to 3 years.

Your goal is totally realistic and doable with the right focus, education and training. I would be happy to discuss sponsors with you as I work with some of best in the business. Also make sure to discuss your plans with your accountant and attorney to make sure you set up the best structure for your goals.

Originally posted by @George Blower :

@Manmath D.

Below are issues to consider as you evaluate this option including issues to consider in chooising a plan 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 full-time 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 full-time w-2 employees (i.e. working 1000 hours or more per year) working for your self-employed business or otherwise.

2. If you are self-employed with no full-time 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.

You can set up the Roth IRA LLC with checkbook control as well and charge a management fee for income.

 

Originally posted by @Brian Eastman :

@Greg Dickerson

STOP!!!

What you are stating is incorrect and in violation of IRS rules. One may not charge management fees from their IRA in any structure.

Check your research on this. If you set up self directed Roth IRA that owns the LLC you can manage the investments and charge a fee. I will day this is not commonly known by many people.

@Greg Dickerson

I stand behind my statement. This field is my specialty. I have been doing this for 15 years. Our tax attorneys have a combined 50 years of experience in this type of tax law. We establish and support checkbook IRA programs.

To pay yourself based on services to your IRA is 100% not allowed. Not gray... not some secret workaround... just a very clear violation of the tax law. Where have you heard this?

Why not instead transfer that 401k into an eQRP so you have more checkbook control? 

@Damion Lupo should be able to help. 

Brian Eastman is correct that under no circumstances can you personally benefit from your retirement account investment, whether it's an IRA, a checkbook LLC IRA, a solo 401k or an eQRP. It's prohibited.

The law for who qualifies for solo K plans just changed Jan 1 so there’s going to be adjustments for those who have solo plans and have long term part time employees. It used to be that as long as you didn’t have any full time employees you could qualify for a solo k. Now if you have certain long term PART TIME employees this will require a safe harbor plan or adp/acp testing. 

An eQRP still works for part time and full time employees but good to check with a competent attorney to see if your plan is okay with the SECURE act changes. Brian could probably speak to this as well. 

Cheers,
Damion Lupo
The eQRP Co. 

Originally posted by @Brian Eastman :

@Greg Dickerson

I stand behind my statement. This field is my specialty. I have been doing this for 15 years. Our tax attorneys have a combined 50 years of experience in this type of tax law. We establish and support checkbook IRA programs.

To pay yourself based on services to your IRA is 100% not allowed. Not gray... not some secret workaround... just a very clear violation of the tax law. Where have you heard this?

The letter of ruling regarding disqualified individuals (you need to dig) if you are less than 50% owner of the entity that is the managing member of the LLC that the IRA owns you are not a disqualified individual. This was all brought about by Swanson v the Commisioner http://selfdirectedira.nuwirei...

There have been several Private Letter rulings on this in EXPRO Exemptions Under PTE 96-62 on IRS website. Again very few people are aware of and use this strategy so you need to discuss this with a tax attorney familiar with these rulings.

@Greg Dickerson

You are not getting this right, and are putting those who might read your posts at risk.  I will still ask you to not say things like the following, which is what I responded to and which is entirely untrue:

"You can set up the Roth IRA LLC with checkbook control as well and charge a management fee for income."

A checkbook IRA LLC is generally 100% owned by the account holder's IRA. While the IRA account holder can administer the affairs of such an entity so as to control how their IRA is invested, they may in no way create any direct or indirect benefit in either direction between themselves and the IRA.

You are a disqualified party to your IRA no matter how you structure entities. Any direct or indirect benefit between you and the IRA is a self-dealing disqualified party transaction.

We are very familiar with the Swanson case and it does not indicate at all what you are implying with the quoted statement about a checkbook IRA. I would also caution that a letter ruling is not law or precedent. It speaks specifically to the facts and circumstances of the submitted request for exception.

As I stated, I have had extensive exposure to very skilled tax attorneys and IRA compliance officers who are leaders in this industry for many, many, years. I stand by my statements and caution anyone who takes your guidance when it comes to IRA rules to be sure they have a licensed tax attorney corroborate what you suggest.

Originally posted by @Brian Eastman :

@Greg Dickerson

You are not getting this right, and are putting those who might read your posts at risk.  I will still ask you to not say things like the following, which is what I responded to and which is entirely untrue:

"You can set up the Roth IRA LLC with checkbook control as well and charge a management fee for income."

A checkbook IRA LLC is generally 100% owned by the account holder's IRA. While the IRA account holder can administer the affairs of such an entity so as to control how their IRA is invested, they may in no way create any direct or indirect benefit in either direction between themselves and the IRA.

You are a disqualified party to your IRA no matter how you structure entities. Any direct or indirect benefit between you and the IRA is a self-dealing disqualified party transaction.

We are very familiar with the Swanson case and it does not indicate at all what you are implying with the quoted statement about a checkbook IRA. I would also caution that a letter ruling is not law or precedent. It speaks specifically to the facts and circumstances of the submitted request for exception.

As I stated, I have had extensive exposure to very skilled tax attorneys and IRA compliance officers who are leaders in this industry for many, many, years. I stand by my statements and caution anyone who takes your guidance when it comes to IRA rules to be sure they have a licensed tax attorney corroborate what you suggest.

There is an exemption in the Code that allows for reasonable compensation for management  found here IRS Code §4975(d) and/or Department of Labor PTE 96-62.   

2)any contract, or reasonable arrangement, made with a disqualified person for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonablecompensation is paid therefor;

The key is operaration and reasonable fee. 

Originally posted by @Brian Eastman :

@Greg Dickerson

You are not getting this right, and are putting those who might read your posts at risk.  I will still ask you to not say things like the following, which is what I responded to and which is entirely untrue:

"You can set up the Roth IRA LLC with checkbook control as well and charge a management fee for income."

A checkbook IRA LLC is generally 100% owned by the account holder's IRA. While the IRA account holder can administer the affairs of such an entity so as to control how their IRA is invested, they may in no way create any direct or indirect benefit in either direction between themselves and the IRA.

You are a disqualified party to your IRA no matter how you structure entities. Any direct or indirect benefit between you and the IRA is a self-dealing disqualified party transaction.

We are very familiar with the Swanson case and it does not indicate at all what you are implying with the quoted statement about a checkbook IRA. I would also caution that a letter ruling is not law or precedent. It speaks specifically to the facts and circumstances of the submitted request for exception.

As I stated, I have had extensive exposure to very skilled tax attorneys and IRA compliance officers who are leaders in this industry for many, many, years. I stand by my statements and caution anyone who takes your guidance when it comes to IRA rules to be sure they have a licensed tax attorney corroborate what you suggest.

I respect your experience and I understand you disagree and are not familiar with what I am referring to. I said Swanson started the movement. I also advised anyone reading to discuss this with their tax attorney which I am not. Check out the exemption for reasonable fees in the IRS code I referenced as well as the LLC interest.

To be clear I am not advising anyone to use this strategy. This is an advanced concept and requires very specific language in the operating agreement with a Private ruling letter.

Best bet is to do as you are recommending which is the traditional way. Even the checkbook IRA LLC is not advisable for most investors.

Michael,
eQRP is another name for qualified retirement plan. Essentially it is solo401k.

Originally posted by @Michael Reilman :

Why not instead transfer that 401k into an eQRP so you have more checkbook control? 

@Damion Lupo should be able to help. 

 

@Taylor L. Thanks. I'll look into Quest Trust Company.

@Mike S. Thank you. That's what I was told by an agent at Specialized Trust Company. They recommended that I have an LLC that shows Business transactions and not just an LLC with no cash going in and out to have a solo 401k. Although I'm employed, I'll have to find a way to open an LLC and put my rental (Duplex that I live in) into it.

@George Blower Thank you. That's really helpful information and I'm trying to soak in as much as I can. Looks like there's ton of info on this subject and seems complicated to me at least for now. 

@Greg Dickerson Thank you so much for your feedback. I'm confident that with right focus and education, I'll be able to do this. Just need to jump in and get the necessary training. 

@Michael Reilman Thank you. I've already listed my phone with @Damion Lupo 's eQrp co and trying to understand the system. 


@Alina Trigub Thank you for the clarification on that one. Not sure why make it so complicated by giving it two names. Why not just say solo 401k. It threw me off when I first heard Damion Lupo on one of the podcast talking about eQrp. But that episode did help me understand a little about UDFI Taxes that I was not familiar with. 

@Brian Eastman Thank you and I'll look into more detail. 

Manmath, there are a lot of options out there for self directed retirement accounts. 

They are not all the same - one of the previous comments is confused thinking they are the same. To be clear, an eQRP ® is not a Solo 401k. A Solo 401k can not be used if you have part time or full time employees and it doesn't offer ERISA liability protection. An eQRP ® on the other hand allows employees and is built with layers of protection quite useful in the event of a lawsuit which in America seems almost inevitable.

The SECURE act that just went into law changed the rules around employees and many Solo 401k's are now going to blow up on a lot of people who have part time employees as little as 10 hours a week. Good idea to discuss these changes with a firm that does more than just Solo 401k's and one that does comprehensive safe harbor plans that have ERISA liability protections etc. Let me know if I can help further.

Damion

eQRP Co.

eqrp.co

Alina,

You are NOT CORRECT. An eQRP ® is not a "Solo 401k".  Many types of retirement plans such as 401k, 457s, 403bs, and the eQRP are all qualified retirement plans, all built differently and all for certain people. A "solo 401k" is not a type plan but rather a name of a generic retirement savings trust designed under the 401k section of the tax code that applies to certain people with no employees.
The problem with them is they are not covered by ERISA to safeguard the owner of the plan in the event of a lawsuit and many states such as California have courts that are open to distributing those funds given the lack of protection. 
The other problem is the SECURE act which totally messes up many "Solo 401k" plans because the government wants to increase participation by part time people which would disqualify many of the solo 401k plans in place by owners who end up having part time employees.

In conclusion, I would encourage you to be mindful of providing expertise in an area that you aren't qualified. The next time someone has a Solo 401k and gets sued thinking all plans are the same after reading your comment you will be partly responsible for any judgement they face that results in having their Solo funds stolen.  

Cheers,
DSL

Originally posted by @Alina Trigub :
Michael,
eQRP is another name for qualified retirement plan. Essentially it is solo401k.

Originally posted by @Michael Reilman:

Why not instead transfer that 401k into an eQRP so you have more checkbook control? 

@Damion Lupo should be able to help.