Self directing IRA money using QRP- Qualified Retirement plan

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?

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Dmitriy Fomichenko

Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes

10y

@Hament Raju Mahajan

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:

www.biggerpockets.com/blogs/2810/blog_posts/21298-...

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.

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Jeff LanghamBusiness Member
Realtor · Carmel-By-The-Sea, CA · Member since 2016 · 54 posts · 25 votes
8y
Lifestyles Unlimited recommends withdrawing your IRA or 401K and paying the taxes and early withdraw penalty and then investing what's left and if you were to invest in a self-directed 401K when you use it for leveraging a property one can pay up to 40%. Then I heard about the QRP and that the 40% tax isn't applicable thus sounding like it's better than just cashing out the 401k all together. I am a little confused as to what's better, cashing it out and taking the tax hit or doing the QRP and just paying the taxes later....if taxes go up in the future it seems like it woudl be better to just pay the tax now. Anyone care to comment?
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
8y
@Jeff Langham
Cashing out your retirement plan before age 59 1/2 means taking a 35-40% tax hit. In addition, you will probably raise the marginal tax rate on all the income you earn in the year of the distribution. Last I heard, most smart investors do not go out looking for a loss of capital in that range. Anyone advising you to do that is practicing financial malpractice.
When a self-directed IRA uses debt financing, there is a small tax on the percentage of the gains that are attributed to the borrowed funds. While the top trust tax rates do reach 39.6%, most investors will not get close to that unless they are working with more than about $500K. And the tax only applies to a small percentage of the overall income based on fractionality of capital and deductions.
So, even in an IRA, UDFI taxation on leveraged investments is not a deal killer. Your IRA will still see the benefits of leverage and a higher cash on cash return as a result - only slightly reduced by UDFI taxation. Most folks are scared away when the word "tax" is mentioned inside the IRA. If you actually run the numbers, it is a small cost for the benefits of leverage.
A Solo 401(k) - sometimes marketed as a "qualified retirement plan" - of which it is one of many - is exempted from UDFI taxation when there is debt-financing associated with the acquisition of real property. So, for those who legitimately qualify for such plans by being self-employed and having no full time employees, the Solo 401(k) is the nicer vehicle for investing in real estate and using mortgage financing.
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George Blower
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
8y
@Jeff Langham
Another option if you qualify is to transfer the pretax retirement funds to a solo 401k plan and then process an in-plan Roth solo 401k conversion. While you would pay taxes on the funds converted, all the gains would grow tax free.
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Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
8y
@Jeff Langham
"QRP" and "Solo 401k" are two terms often used to describe the same thing. Since the Solo 401k is a qualified plan under IRS guidelines, some firms called their product a QRP (qualified retirement plan). Either way, these 401k plans are exempt from unrelated debt financed income tax on leveraged real estate. This is the "up to 40%" you are referring to in your post. Note that this UDFI would apply to IRAs with debt-financed real estate. There are several other advantages Solo 401ks (or QRPs or Individual 401ks, etc) offer over IRAs. If you think you are eligible for a Solo 401k, it can be helpful to contact a few providers to learn more about how one can help you achieve your investment goals.
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Bernard ReiszPro Member
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
7y
@Jeff Langham
Would be great to know how things actually turned out.
I'm encountering more and more people that are being encouraged to take distributions from tax-sheltered retirement accounts and other questionable advice - along with misinformation and confusion. Did others encourage you to take that step and swallow the tax plus penalties?
From people that I've spoken to recently, it seems many are misinformed about QRPs, Solo 401(k)s, SDIRAs, UBIT, & UDFI. All these acronyms seem to confuse some people.
Some examples:
- IRAs and QRPs have different tax treatment and different qualification requirements (nearly everybody qualifies for an IRA). An IRA is not a QRP.
- QRP = Solo 401k. Technically, QRP is a much broader term, encompassing many types of Qualified Plans. Within the context of real estate investing, when a QRP is contemplated it is nearly always referring to a Solo 401k Plan. There are an array of marketing terms used to refer to the same structure.
- A QRP/Solo 401k requires the presence of a "trade or business."
- Debt investments, whether in an SDIRA or a QRP/401k, are not subject to UDFI.
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Jeff LanghamBusiness Member
Realtor · Carmel-By-The-Sea, CA · Member since 2016 · 54 posts · 25 votes
7y
I spoke to a solo 402k provider and a CPA and it turns out I don’t qualify as I’m not self-employed.
Jeff Langham, MBA, Realtor®518 Reviews
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Bernard ReiszPro Member
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
7y
@Jeff Langham
(Thanks for your vote!)
Sounds like you spoke to a provider that looks out for their clients - and doesn't just want to "sell" them a plan.
A QRP/SoloK is the best plan for those that qualify for it and the worst plan for those that don't.
If you haven't distributed the retirement account, you can consider:
- a "side-gig" or "side-hustle" that would generate the necessary self-employment income to sponsor a Solo 401k. (There's no bright-line test as to what constitutes a trade or business, but an ongoing part-time activity can qualify.)
- "Being the bank" - aka "private lending" - through an IRA. This would not be subject to UDFI and benefits incredibly from the tax-sheltering of an IRA; unlike rental income, private lending has no depreciation tax shield.
- If you're focused on rental properties and don't want to entertain private lending, calculate the after-UDFI return on your rental property investments and see how those compare to your other IRA options. It's likely to remain your most attractive option.
Best of luck!
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Jeff LanghamBusiness Member
Realtor · Carmel-By-The-Sea, CA · Member since 2016 · 54 posts · 25 votes
7y
I didn't realize that a side gig was an option and was advised that since I currently am a W2 employee it wasn't an option so I rolled my TSP over to a self directed IRA.
Jeff Langham, MBA, Realtor®518 Reviews
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Bernard ReiszPro Member
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
7y
@Jeff Langham :(
On the bright side, you still have the option of rolling over to a QRP/401k. Whether or not that is feasible depends on the options available to you.
The lengths to which you should go to qualify for QRP/401k depends on multiple factors, many of which were touched upon earlier in this thread.
In addition to the factors already mentioned, there are - likely - cost savings to using a QRP/401k. This depnnds on the fees charged by your IRA-provider and the fees that would be incurred to the QRP/401k provider. Fee structures are all over the place and, in this industry, paying more is not always indicative of a better service.
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Howard Greisman
Investor · Jacksonville, FL · Member since 2010 · 71 posts · 14 votes
7y
Hi, Thanks to everyone who has contributed, great information. Can you take your current Self Directed IRA account and roll it over to a Solo (401)k account? Thank you.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
7y
@Howard Greisman
If you are eligible for the Solo 401K and your IRA is not Roth - you can roll it over.
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Howard Greisman
Investor · Jacksonville, FL · Member since 2010 · 71 posts · 14 votes
7y
Thank You. Two more questions if you don't mind. If I qualify for solo 401(k) now and I roll over my trad. IRA from self directed. Say in a few years I decide to work full time for someone and no longer qualify for the solo 401(k). What happens to that solo 401(k), do I have then roll it back to a self directed IRA? Does driving for Uber qualify you for solo 401(k)? Thanks again.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
7y
@Howard Greisman
Yes, driving for Uber makes you self-employed and as such you qualify for Solo 401K.
You can have a W2 job and drive for Uber on the side and keep your Solo 401K active.
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Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
7y
@Howard Greisman
As mentioned, you can still have a Solo 401k even if you work full time for someone as long as you still maintain some self-employment activity. I've seen many people work full time and adopt their plans with part time businesses. That said, if you are no longer eligible for a Solo 401k, you could then transfer the assets to another retirement account, such as a self-directed IRA.
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Howard Greisman
Investor · Jacksonville, FL · Member since 2010 · 71 posts · 14 votes
7y
Can anyone recommend anyone for signing up for a solo 401(k)? Thanks for all your help.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
7y
@Howard Greisman
There are several of us commented here who are service providers. We can't self-promote but start by looking at each member's profile and look at the reference section, there you will find feedback from other BP members.
Hope this helps!
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Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
7y
@Howard Greisman
If you look through this thread of responses, you will find some providers who can help. If you reach out to a few, they should be able to show you reviews and testimonials from happy clients both from BP members and non-members.
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George Blower
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
7y
@Howard Greisman
With regards to considerations in choosing a Solo 401k provider:
Of course, the threshold considerations are whether (i) you are eligible (i.e. self-employed with no full-time w-2 employees) and (ii) retirement funds in an account that you can rollover (i.e. former employer plan and/or non-Roth IRA that is invested in investments that can be liquidated an acceptable cost).
Assuming that you cross these threshold issues, here are some additional comments/considerations:
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.
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Howard Greisman
Investor · Jacksonville, FL · Member since 2010 · 71 posts · 14 votes
7y
@George Blower
Hi, thanks for the info. You make it sound like I need an administrator. I thought that was one of the reasons to choose a solo 401(k), so you don’t have an administrator.
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George Blower
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
7y
@Howard Greisman
You always need a plan provider. My point is that in my experience it is wise to select a Solo 401k plan provider with experience, expertise and a pristine service reputation that fits your need. Technically, the provider is different from the administrator in that the provider won't necessarily have access to your funds, etc.
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Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
7y
@Howard Greisman
The majority of the plans we've seen in the checkbook control sector of the industry are setup with the adopting employer as the administrator. Plans that cover non-owner employees usually have third party administrators, but Solo 401k plans are most often self-administered.
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