Investor · Sanfrancisco , CA · Member since 2008 · 46 posts · 7 votes
Currently I use Self Directed IRA custodians (Pensco and others) to be able to use my IRA funds for investment in Secured Notes. At times it becomes a time consuming effort to deploy funds to a deal.
I am setting up a QRP where the plan to be attached to my LLC and I could check book control control the IRA funds .
Would like to get comments from some one who has done QRP or know about it. Setting up QRP makes all the sense with the control one has and it seems cheaper to as compared to having a independent IRA custodian , what is the down side to it?
if you setup a truly self-directed Solo 401k (which is a Qualified Retirement Plan) - it will be much more flexible and more powerful compared to a SD IRA. There are several major advantages, I describe them in this blog:
You are correct, that with this new structure you don't need a custodian - this mean that all custodian fees will be eliminated and you don't have to go get approval for each transaction.
Also, Solo 401k uses trust to hold assets of the plan - therefore underlying LLC that is used with the IRA to gain the checkbook control is not needed. This equates to additional savings and simplified structure.
Hope this helps but if you have further questions go ahead and ask.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
The downside is you're totally on your own to stick with the rules.
You say "attached to my LLC". If you mean some existing LLC I'm almost certain you DO NOT want to do that. You should create a new LLC with the proper operating agreement to be sure it follows the criteria established by the Swanson ruling. I used Guidant Financial to do this. However, they have recently sold this business to law firm in Utah, iDirect Law. No real experience with them yet.
Portland, OR · Member since 2015 · 1 post · 0 votes
10y
Just wondering what has happened with the qrp in the llc. we are doing our first gap fund with "our own" money. I'm looking to roll over funds from a tsp into either a self-directed ira or a qrp but even with all of the information sources, I still can't figure out which one is most advantageous. For the forseeable future, we plan on doing mostly gap funding. Any input is greatly appreciated.
The downside is you're totally on your own to stick with the rules.
You say "attached to my LLC". If you mean some existing LLC I'm almost certain you DO NOT want to do that. You should create a new LLC with the proper operating agreement to be sure it follows the criteria established by the Swanson ruling. I used Guidant Financial to do this. However, they have recently sold this business to law firm in Utah, iDirect Law. No real experience with them yet.
Jon, I think he is not referring to setting up an LLC owned by his retirement account, but rather establishing a QRP (Qualified Retirement Plan or a 401k) for his business, which is an LLC. In order to establish a QRP a legitimate business with earned income is required.
if you setup a truly self-directed Solo 401k (which is a Qualified Retirement Plan) - it will be much more flexible and more powerful compared to a SD IRA. There are several major advantages, I describe them in this blog:
You are correct, that with this new structure you don't need a custodian - this mean that all custodian fees will be eliminated and you don't have to go get approval for each transaction.
Also, Solo 401k uses trust to hold assets of the plan - therefore underlying LLC that is used with the IRA to gain the checkbook control is not needed. This equates to additional savings and simplified structure.
Hope this helps but if you have further questions go ahead and ask.
Just wondering what has happened with the qrp in the llc. we are doing our first gap fund with "our own" money. I'm looking to roll over funds from a tsp into either a self-directed ira or a qrp but even with all of the information sources, I still can't figure out which one is most advantageous. For the forseeable future, we plan on doing mostly gap funding. Any input is greatly appreciated.
Welcome to BP, Gretchen. The Solo 401k (which is a qualified plan) is the better structure when compared to any IRA, hands down. One of the downsides, however, is that there are eligibility requirements to this plan. If you have self employment activity and no full-time employees, you should look into the Solo 401k plan as a suitable structure for your retirement investments.
Both were created by congress for individuals to save for retirement;
Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
Both allow for Roth contributions;
Both are subject to prohibited transaction rules;
Both are subject to federal taxes at time of distribution;
Both allow for checkbook control for placing alternative investments;
Both may be invested in annuities;
Both are protected from creditors;
Both allow for nondeductible contributions;
Both are prohibited from investing in assets listed under I.R.C. 408(m); and
In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
To open a self-directed IRA, self-employment income is not required;
In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
The solo 401k allows for checkbook control from the onset;
The solo 401k allows for personal loan known as a solo 401k loan;
It is prohibited to borrow from your IRA;
The Solo 401k may be invested in life insurance;
The self-directed IRA may not be invested in life insurance;
The solo 401k allow for high contribution amounts (for 2015; the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
The solo 401k business owner can serve as trustee of the solo 401k;
The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
Pre-tax IRA contributions on reported on line 32 of Form 1040;
Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
Roth solo 401k funds are subject to RMDs;
A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
Roth IRA funds are not subject to requirement minimum distributions (RMDs);
The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
At termination, the self-directed IRA is only required to file a form 1099-R.
@Mark Nolan did an excellent job providing a side-by-side analysis of SD QRP/Solo-K vs SD IRA. A vast majority of my clients utilize solo-401ks for their real estate & other non-traditional investments. The pro's win in the solo-k category by far. We always encourage this route when setting up SD investment vehicles. Adding the layered "checkbook control LLC" to that is yet another layer that's possible, but varies by individual investor needs. Those that invest in quick turn around notes or tax liens for example may want to explore that option further. As noted previously, there is additional accountability that comes with this structure.
Investor · Sanfrancisco , CA · Member since 2008 · 46 posts · 7 votes
10y
Thank you all for such a comprehensive information on a topic which is not very known :)
Yes I am using a trust account attached to my LLC for the SD IRA - QRP. End of the year we have to file a IRS - DOT simple form 5500-EZ as the parent LLC Is 100% owned by us (husband and wife).
This form is also very easy to fill up.
Good thing that the CA state does not ask for any formalities for this .
Yes I am using a trust account attached to my LLC for the SD IRA - QRP. End of the year we have to file a IRS - DOT simple form 5500-EZ as the parent LLC Is 100% owned by us (husband and wife). This form is also very easy to fill up.
Hament, I'm assuming you are referring to SD Solo 401k (not SD IRA)? Form 5500-EZ is not required for IRA, but for the 401k.
perhaps you are explaining it incorrectly or you didn't get the correct setup. The LLC is the sponsor of the plan has an EIN, but the PSP (the trust) should have it's own EIN. Those are two separate entities and can't be using the same EIN.
Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
9y
Timing couldn't be better for me as I am about 3 months away from starting my 12 year plan to retirement. I essentially will be doing buy and hold investing with maybe a fix an flip thrown in.
@Dave Foster has given me some awesome advice on 1031 strategies that I do really like.
I do however really like the benefits a QRP/Solo 401K offers in terms of allowing you to fund your real estate purchases, as long as you aren't using them for personal gain (rentals that you never lived in or used on vacations). It seems to me like 1031 exchanges and this can both be utilized to some degree. Question I have is if my employer has a matching 401K plan (which they do) can I fund my Solo 401K account with those pre tax dollars or does the employer typically make you use whomever they already have set up to do it (in my case Fidelity)?
Solo 401k Provider · Anaheim, CA · Member since 2014 · 18 posts · 7 votes
9y
Curtis, if you have a 401k with your current employer they will not allow you to roll it out while you are employer there. When you leave that employer at that time you will be able to move those funds into an IRA or Solo 401k.
You cannot use the income you make at your employer to directly fund a Solo 401k plan. Contributions to the Solo 401k must come from the business or self-employment activity that adopted the plan. You can transfer previous employer plan assets to the Solo 401k plan, but you likely will not be able to access those funds for rollover until you leave your employer. Check with the plan administrator to see if the plan allows for in-service distributions. Most do not, but it is worth asking.
Thanks for the clarification, but now I need more clarification!
Employer 401K thing I totally get. I'll just contribute, let them match my 6% with 3% and ride it till the wheels fall off (meaning they fire me or I quit). At that point roll it over and use it. Fine if I'm there 12 years or shorter, not so fine if I'm there longer than that. I don't plan to be since I'm retiring my day job in 12 years.
What isn't so clear is how people who start these plans to fund real estate investments do their initial contributions? Do they purchase the first piece of property using outside funds, then eventually the proceeds from the sale go into the account? This is what is not adding up to me. Seems the beginning is the hardest part, but once it's rolling it's fantastic.
Yeah if you don't have enough funds accumulated in the former employer 401k when it it is transferred to the solo 401k for investing in real estate, your best bet initially may be to invest in tax liens to grow the solo 401k plan. Then, once you have enough funds in the solo 401k plan to invest in real estate, the solo 401k can invest in the property. The solo 401k can also get a non-recourse loan if you don't have enough funds in the plan to buy the property outright.
Contributions can only be made from the earned business income. You have to have enough funds in your Solo 401k plan to make the investment. You can also partner with someone else who is not a Disqualified Person or use leverage.
Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
9y
Ok well there is the achilles heel in my opinion, which is what I was trying to get to all along. All these plans have one. I still think this is the best plan long term and it beats the snot out of an IRA, but if you don't already have an account with decent funds to rollover, this is a little tough in my opinion.
Can I wholesale a couple deals and put the proceeds into the plan? I don't want to wholesale but if that's the only way to get money in this this thing maybe I can do a couple. I am assuming I can't get private funding for a deal I want to put the proceeds into this plan either right? Fundraiser? Lemonade stand? Stand in front of the grocery store with a clipboard and coffee can?
Can I wholesale a couple deals and put the proceeds into the plan? I don't want to wholesale but if that's the only way to get money in this this thing maybe I can do a couple. I am assuming I can't get private funding for a deal I want to put the proceeds into this plan either right? Fundraiser? Lemonade stand? Stand in front of the grocery store with a clipboard and coffee can?
Curtis, in order to open a Solo 401k plan you need to have legitimate business or self-employment activity. Contributions to the plan can be made from the earned income of the business sponsoring the plan. Fundraiser is not a business. Lemonade stand sounds like a hobby not a legitimate business...
You should speak with the expert to determine your eligibility.
I was only kidding about the fundraiser or lemonade stand :-)
I'm just being overly dramatic about how hard it seems to fund this plan in the beginning. But my real question was about wholesaling/assigning a couple deals to make $5K-$10K or so to fund the plan. Is that allowed? It seems unless you are licensed as an agent who can get commissions on listings (whom is not employed by anyone), there literally aren't many ways to initially fund this plan. If you are an investor you buy and sell houses and/or notes for the most part. How in the world do you buy your FIRST house and/or note if you can't fund the plan? I guess that's what I haven't wrapped my head around.
@Mark Nolan mentioned a non recourse loan to fund the first one, but how how common does that happen? If it's fairly common then that seems like the way to go. You said earlier in the post to partner with someone else. That seems like a great idea as long as someone else can mean pretty much any other investor that is not tied to my plan. Is that the case? If it simply means partnering with someone on my first deal, and take my half of the profit and fund the plan, perfect. Sounds like a winner.
Non-recourse loans are certainly common enough. There are several financial institutions that specialize in non-recourse loans. In addition to these, some banks and credit unions also offer them, and many private lenders offer non-recourse loans, some with their own self-directed IRA or 401k providing the funding.
Non-recourse loans are a way for the Solo 401k to obtain financing for an investment. It is a different tool from partnering with others, which can also be allowable.
Solo 401k Provider · Anaheim, CA · Member since 2014 · 18 posts · 7 votes
9y
Curtis,
if you have a wholesaling business you can use that to sponsor a 401k plan and use income from the business to make contributions to it. But it has to be legitimate business, something that you continue to do (if you just do two deals and you are done this is not a legitimate business for the purposes of establishing the plan).
This link to the IRS website will help you better understand what self-employment is: