Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
I'm in the process of converting a 401k into a SDIRA and was wondering if any fellow BPer's would care to share what has worked or not worked for them using this investment approach. Is it best to purchase individual notes on a case-by-case basis, work with a group of private investors pooling money together or ????
Did your initial approach work or not? How did you tweak it to suit your business goals?
I've read the other posts on finding a good company to manage the SDIRA and have found some valuable information, but am more interested in individual opinions on the best places to start, with the intention of increasing the amount of cash available to put towards purchases and rehabs.
Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
13y
Originally posted by Page Huyette:
This might work for someone who is self-employed, but what about someone who isn't? It is my understanding they would not be able to open a Solo 401k.
Page, you are right, you have to be self-employed to partake in a SD 401K. But, you could also have a full time job and a part time self-employed business on the side. You may not be able to contribute much to the 401K, but if you have a large chuck of change from a previous employer, an SD 401K may be a better option than an SD IRA.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
13y
My wife & I are self employed so after a significant amount of research we went the 401K(solo) route about 7 years ago.
No guardianship, total (our own bank) checkbook control, no third party involvement OR fees etc.
We purchase properties on the fly, fast closings & do not need to have anything approved by a 3rd party.
We generally do LTO or just sell after rehab to buyers we already have lined up.
We adhere strictly to arms length/no hint of a prohibited xaction rules.
It's a great concept & returns using the LTO concept are phenomenal.......we just had a couple walk away from 4 years of LTO payments (& $20,000 of renovations @ their expense) on a SFH.
The week they gave us notice we already had a new couple sign up & move in without any downtime.
Real Estate Investor · Muncie, IN · Member since 2012 · 28 posts · 15 votes
13y
watching this myself for the responses.
@Pat L. - I know SDIRA's have arms length prohibited transactions as well, which lead me to believe I couldn't invest in my own projects. i.e. couldn't use the funds to purchase a house for rehab through my LLC.
Do you know if the 401K(solo)'s arms length prohibited transactions are the same as SDIRA arms length prohibited transacation?
Highly interested in this topic! Page Huyette - Thanks for asking it!
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
13y
Originally posted by P.J. Hankins:
watching this myself for the responses.
@Pat L. - I know SDIRA's have arms length prohibited transactions as well, which lead me to believe I couldn't invest in my own projects. i.e. couldn't use the funds to purchase a house for rehab through my LLC.
Do you know if the 401K(solo)'s arms length prohibited transactions are the same as SDIRA arms length prohibited transacation?
Highly interested in this topic! Page Huyette - Thanks for asking it!
P.J.
I have a guy I use that does all my renovations. He works on anything held in the 401K(s) & I just 'advise' but I pay for all work/materials from the 401K.
As per my recent IRS Audit I did show that the properties were purchased & renovated using an arms length 1099 contractor. Because I personally did not do any work or receive any financial (management) consideration, it passed scrutiny.
I hold title in the name of the 401K (with high liability insurance) until the place is sold, not in an LLC per se. However, for those I buy as an LTO (for a pre-approved buyer), title is held in an LLC with funding from the 401K.
So from my experience you can purchase property and title it in the name of an entity and fund it with (in your case) an SDIRA as long as you (or immediate family etc) do not own the property before hand.
Be careful in your closing documents (HUD) that you do not show any form of management fee/financial consideration to yourself or non arms length entity etc. The para legal inadvertently did have my usual admin fee recorded on one & we had to retract it. (The IRS Auditor did randomly review several of my closing documents & the fees etc paid out).
Keep very good records.....
good luck
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Page Huyette and everyone else,
I highly recommend considering going a different route than the SDIRA and utilizing the Solo 401k's ability to invest into your own C-corporation. You can use the C-corp to JV, lend, or pretty much whatever you would like as it is a taxable business. You can also contribute to said 401k and reinvest. You can also pay other benefits.
Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
13y
Originally posted by Page Huyette:
This might work for someone who is self-employed, but what about someone who isn't? It is my understanding they would not be able to open a Solo 401k.
Page, you are right, you have to be self-employed to partake in a SD 401K. But, you could also have a full time job and a part time self-employed business on the side. You may not be able to contribute much to the 401K, but if you have a large chuck of change from a previous employer, an SD 401K may be a better option than an SD IRA.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Originally posted by Page Huyette:
This might work for someone who is self-employed, but what about someone who isn't? It is my understanding they would not be able to open a Solo 401k.
Correct, but like Chris stated, simply open one up and then roll it over. The 401k has many more advantages over the IRA version.
My investments from my solo k plan go into notes. I purchase notes with it and earn high yield returns due to the fact that I buy performing notes at discounts. I also intend to lend from it as well in the near future as the account grows larger and larger.
My opinion: Holding RE in an already tax advantaged account is NOT the best use of retirement account funds. Lending or buying paper is the best, again, my opinion.
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
13y
I have a Solo 401K! WAAAY better than an IRA. Much higher contribution allowances. I have my money loaned on 1st lien real estate. I have six figures loaned between 13% and 15% and higher. That is not a bad return. What I like about loans rather than outright owning the property is that I only have to deposit their checks. I also own real estate outside my 401K. I have a two prong approach..real estate outside my Solo 401K and mortgages inside my 401K. Between the two I should be able to retire soon.
My advice (and I am NOT a CPA, CFP, etc---just a working man) would be get the Solo 401K if you can. You have as many advantages as a SD IRA, and also a LOT more. If you go the solo route, you have a LOT more flexibility. FYI--in my opinion the Solo 401K is the BEST THING I have ever done for my retirement.
BEST of luck!
MGJohn
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
13y
p.s.---I am almost certain you CANNOT contribute to more than one company sponsored plan in any calendar year. In 2011, I had a SIMPLE IRA. I found out about Solo plans in 2011, but because I had already put money into my SIMPLE, I could not participate in the Solo 401K. In 2012, I made my first contribution into my Solo, and rolled over every dime sitting in my SIMPLE. I can give you an attorneys number that sets up these programs and you can give him a call if you wish. Let me know....
MGJohn
Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
13y
Did you set up your solo 401K through a specific company, one you already had other accounts with, or is it best to research the options just as one would for a company to manage a sdIRA?
Will and John, are you suggesting opening a Solo 401k and staying away from the sdIRA entirely, or doing both with different investing goals for each vehicle?
This also opens up the old question of whether it is worth pulling $$ out of a 401k and taking the penalty hit, or letting it sit there. I'm inclined to be more aggressive, take the penalties and put it where I can manage it myself.
Real Estate Investor · Jacksonville, FL · Member since 2012 · 109 posts · 22 votes
13y
It seems like many of the responses have been more in line with the way you should set it up as either sdira or solo 401k etc and I took the question more to mean how have we been investing our sdira funds. I think it is somewhat of a personal question based upon goals for your sdira and the capital available. I personally have been doing private lending out of my ira. I've personally worked with company buying distressed properties, renovating them, renting them and then they sell them. I've started off with companies that pay a decent interst rate but not the highest but have a long track record and as I'm getting my feet wet considering other options and meeting more individuals.
I have never done any flips but I could see where if done properly to maintain the arms length transaction it would be nice to have the gains in a sdira.
I personally only hold rentals so I prefer to own those outside my ira for the tax benefits.
Contractor · Atlanta, GA · Member since 2012 · 176 posts · 103 votes
13y
Another vote here for private lending from IRA. If you own property you miss out on the tax benefits. Also flipping is considered business income rather than investment income and could trigger UBIT.
Investor · Omaha, NE · Member since 2011 · 475 posts · 211 votes
13y
I have used my SDIRA to but multifamily and have it 3rd party managed. I wanted to diversify the portfolio out of the stock market and I like the idea of being able to use leverage. So far it's worked for me.
Roseland, NJ · Member since 2012 · 73 posts · 20 votes
13y
Some clarifications if I may:
You can title a property in the name of an LLC that is owned by your SDIRA or Solo k; however, it must be an LLC that is newly formed for the purpose of your SD account funding it. It can't be an LLC you already own and are using for any other purpose. This is very important.
In addition, you don't incur any penalties when you rollover from a 401k into a SD account as long as it is done correctly.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
My suggestion was to set up the solo 410k plan rather than the SDIRA. Then use it for buying notes and or lending.
As far as the age old question, again, I don't believe in handing over to Uncle Sam anything extra and taking the full early withdrawal and getting hit with the tax plus 10% penalty is Not in my best interest and would suggest not in your either, but certainly great from the IRS standpoint. Better option would be to convert to Roth and take the tax hit now, but not the penalty. Or, just roll over to the solo k plan and start building it. The great thing about such an account is your own ability to manage it without a TPA and with checkbook control.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
13y
The 401K (solo) has a more significant contribution limit
Assuming you have an S-corp or C-corp, the Salary Deferral Contribution for 2012, 100% of W-2 earnings up to the maximum of $17,000 or $22,500 if age 50 or older can be contributed to a Solo 401k.
However, Spouses both on their corp payroll can increase this contribution up to $102,000 depending on the structure etc of the corp.
However, a SDIRA contribution is limited to $5,000-$6,000 depending on age etc.
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
13y
Being over 50, I was able to contribue $22,500 into my Solo 401K. I like the 401K better than an IRA due to higher contribution limits. Check with your CPA to verify that. I am using my Solo 401K to do hard money loans. This has allowed me to make very high returns and, in my opinion, they are safe, secure, and guaranteed for the most part. Talk to your CPA about a Solo. I am self employed, have no other employees, and there are rules about them being "top heavy" which I don't know anything about. If you are self employed and the only employee, I believe your CPA might tell you that this would be the best route to go. Using the rule of 72, if you get 15% per anum compounded, you can double your money about every 4.8 years.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Originally posted by John Thedford:
Being over 50, I was able to contribue $22,500 into my Solo 401K. I like the 401K better than an IRA due to higher contribution limits. Check with your CPA to verify that.
No doubt about it, 401k DOES have higher contribution limits and o top it off, company matches so you can actually add much more than $22k to it each year.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
13y
Originally posted by Steven Hamilton II:
Plus one for the Solo 401k and a business.
Will Barnard and Pat L. have it exactly correct.
-Steven
they have been around for many years & still few people use them or make any effort to implement it into a Financial Plan !!!!
Back in the 90's we couldn't get a Financial Advisor interested in our pursuit of the SD 401(k). But once formed we used OUR cash for high % mortgage notes & "Compound Interest is definitely the 8th wonder of the world'.
Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
13y
I'm now leaning towards the solo 401k, thanks to the great responses on this thread.
I have an established business, and am wondering if I should set up the solo 401k in my name or a new LLC. Anyone know of any advantages/disadvantanges to one method over the other? My plan is to first buy notes, then be a small lender and evolve into purchasing properties with the 401k.
A huge THANK YOU to everyone asking questions and especially to everyone providing responses. My questions have been asked so I have nothing new to contribute, but I wanted to offer a sincere thank you for this information. I am meeting with an SDIRA company this week, so I now have more questions to ask of them and I know that I want to consider SOLO 401K now as well.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Originally posted by Page Huyette:
I'm now leaning towards the solo 401k, thanks to the great responses on this thread.
I have an established business, and am wondering if I should set up the solo 401k in my name or a new LLC. Anyone know of any advantages/disadvantanges to one method over the other?.
There is only one method, you must form your solok plan from your business. So if yr current business is ABC basket weaving, then your 401k plan must be from/for that business. Example, ABC basket weaving 401k plan.
You can't have one business, then set up a new entity just for the 401k.
Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
13y
Originally posted by Will Barnard:
There is only one method, you must form your solok plan from your business. So if yr current business is ABC basket weaving, then your 401k plan must be from/for that business. Example, ABC basket weaving 401k plan.
Thanks for the clarification. The more I learn, the more questions I have--love it!
Getting back to the original question--once the 401k is set up, what are some ways people have found the best ways to invest that aligned with their goals? In other words, did you research companies that fix and flip and work with them, how did you find a company or person to work with that has a good track record with solid returns?