Self directed 401K or IRA

7 Replies

I have heard that it's possible to set up a self directed 401K or IRA that you can use to invest in your own real estate tax free. I am wondering if anyone has done this? It seems too good to be true. Each week I set aside $175 for real estate. Can I really pull that money (plus the additional tax that I would no longer be losing) and put it into one of these self directed accounts and then use all that money on my real estate deal? I am from Akron Ohio if that makes an differentce. Thanks for the help!

@Hunter Eidmann ,

You can set up a self-directed IRA (or Solo 401k if you are eligible), you can fund it with new contributions (subject to annual limit of $5,500) or rollover from another qualified retirement plan, and then IRA can invest in real estate, but it can't be a property that you already own, has to be brand new investment.

Not sure what you mean by "your own real estate"... IRA will be the owner, not you personally.

Tax-free can only be done with Roth IRA or Roth 401k. Traditional IRA is tax-deferred (you pay taxes on distribution).

Hello and welcome here Hunter!  I have done a little learning about that the last few months.  Some things you might not know about with a self-directed account.  One of those things is that all real estate loans have to be non-recourse which requires a larger down payment of about 40 or 50% and any profits made have to go into that account, not you.  Also, loans have to be made to the account name and not in your name.  Most banks will not allow that.

Good luck to you!

@Hunter Eidmann

Yes, there are a lot of folks using self-directed IRAs and Solo 401ks tp invest into real estate. There are many thread here on Bigger Pockets with a lot of good information on the subject. Several providers that post here regularly can help answer questions and setup such an account for you. If you're self-employed, the Solo 401k will likely be the better fit for you.

Here are few Solo 401k benefits:

Compared to an IRA, Solo 401k contributions limits are roughly ten times higher.

There is no custodial requirement for the 401k.

You can take participant loans from the plan.

You don't need the additional expense and administration of an LLC to have checkbook control.

There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.

A spouse can also participate in the same Solo 401k plan.

The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage.

If you're not self-employed or if you have a business with employees, the self-directed IRA will be your main option. It can be paired with a special purpose LLC if you want checkbook control.

@David J Lepard @Hunter Eidmann

Hopefully, you've identified the best route for yourselves since these posts went up. If it's still of value, it's worth clarifying some things about QRPs, Solo 401k, and Self-Directed IRAs - as over the last few months I've realized there are a few misconceptions that I repeatedly encounter:

There are 2 groups of tax-sheltered retirement accounts:

  1. IRAs - Individual Retirement Arrangements
  2. QRPs - Qualified Retirement Plans

Each one of these has multiple sub-categories. For example:

  1. IRAs - Traditional IRA, Roth IRA, SEP-IRA, SIMPLE-IRA
  2. QRPs - 401k plans, profit sharing plans, defined benefit plans, etc.

For real estate investing, the optimal plan type is a QRP that is intended for an "owner-only business." Such plans are referred to by many names, including: QRPs, Solo 401k, Checkbook 401k, etc. None of these are terms that you'll find in the tax code, rather they are "marketing terms." They attempt to convey to the user what the nature of the QRP plan design is, so that consumers understand what they're getting and how to maintain a plan compliantly and not get in trouble with the IRS. 

For example "Solo 401k" conveys that the type of QRP being established is a "401k plan" that is is for Solopreneurs. The terminology used attempts to convey key info, namely the requirements for having such a plan:

  • You need to own business
  • That business should not have employees other than yourself

Other terms are less informative. For example, the term QRP is the broadest terminology possible; it's just a catch-all for a large group of retirement plans. Before getting a QRP, you should make sure to get very specific information to ensure that it's well-matched to your financial and tax profile. What type of plan is it? Do you qualify for it? Is it just a Solo 401k by another name?

All QRPs must be tied to a business (unlike IRAs) and that's were I'm encountering the greatest pitfalls. People getting QRPs without having a business that would qualify them for such structures. 

@Bernard Reisz

Good post and a good way to organize thoughts.  I have a couple comments:

1. A Solo 401k may be established by a business with employees who don't meet the eligibility requirements (i.e. w-2 employees who work 1000 hours per year with 1 year of service).

2. I agree that it is essential that one meets the eligibility requirements before setting up a Solo 401k. Just to be clear: while a "business" this business does not need to be operated via a formal entity (like an LLC) and a sole proprietor could set up a Solo 401k (or even someone who has a w2 day job and a side business).

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