Rental Property Investor · Weaver, AL · Member since 2016 · 24 posts · 13 votes
Recently, I heard that you could take your 401k and transfer it to a self directed IRA to use for real estate. You would need to invest in a LLC to do this. However, I was in the process of transfer my 401k to a SDIRA and Fidelity told me that the LLC has to be publicly traded. Has anyone been able to do this? How does it work?
I think the person you spoke with might not have been fully informed. I transferred some of my IRA funds that were held in a Fidelity account to a SDIRA custodian (AdvantaIRA) . I set up a separate LLC and a separate bank account. The folks at Advanta held my hand all along the way, they were terrific. they have lots of educational videos as well.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
3y
Fidelity isn't set up to handle this type of account. You'd need to work with a custodian that is set up for self directed IRAs. There are a ton of them, I'd recommend searching the BP forums and doing your research before moving forward. There are a lot of details and potential pitfalls to SDIRA investing.
Real Estate Agent · Riverview, FL · Member since 2015 · 4 posts · 3 votes
3y
I set up a SDIRA through Equity Trust. I use it to participate in some RE syndications. When I inquired about buying investment properties with it they told me I had to purchase the property with the fund name as owner.
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
3y
@Kenneth Bentley "Self-Directed" is a very broad term and simply means that you, rather than a financial advisor, make the investment decisions for the account.
Most conventional brokerages like Fidelity offer self-directed IRAs, but they limit you to investing in what they sell, which is just the stock market.
A truly self-directed IRA is generally offered by a specialty firm that has the capacity to process transactions for alternative assets such as real estate. The IRA itself is the same with respect to contributions, distributions, reporting, and inheritance. The difference is the ability of the plan to be invested in a more diverse choice of assets, including real estate.
There are several quality providers of self-directed IRA services active here on BiggerPockets. Do a few searches in the forums and you will be able to identify who knows about this topic and can assist you.
I think the person you spoke with might not have been fully informed. I transferred some of my IRA funds that were held in a Fidelity account to a SDIRA custodian (AdvantaIRA) . I set up a separate LLC and a separate bank account. The folks at Advanta held my hand all along the way, they were terrific. they have lots of educational videos as well.
Irvine, CA · Member since 2014 · 94 posts · 44 votes
3y
You need to move your money to a Self-Directed account that allows investments outside of the stock market. Brokerage firms and banks typically do not allow this.
Investor · Tampa, FL · Member since 2020 · 287 posts · 152 votes
3y
@Kenneth Bentley Hey Kenneth. If you have an employer they may not allow you to do this, if you're self employed you would use a custodian such as Advanta IRA, they will instruct you to create an LLC first that will manage the funds. Once that is created you will open a business bank account under that LLC. Upon completion of that you will be able to roll your funds over to this SDIRA account that is a plan under your new LLC. Now you will be able to use this money to invest in real estate or any other investment vehicle you want for that matter. I would recommend looking into a Solo 401k over a SDIRA because you can borrow up to half the amount of the account with no penalty and use that money as well where with a SDIRA you cannot.
@Joseph Stern good thought about the Solo401K benefit. Do you happen to know if one can roll SDIRA funds into a SOLO401K? Am I correct in assuming that you can have both a SDIRA and a SOLO401K? Any downsides of a SOLO401K?
@Joseph Stern good thought about the Solo401K benefit. Do you happen to know if one can roll SDIRA funds into a SOLO401K? Am I correct in assuming that you can have both a SDIRA and a SOLO401K? Any downsides of a SOLO401K?
Yes Laurie, you can rollover IRA into Solo 401k. The only exception would be Roth IRA - IRS doesn't allow this account to be moved to 401k. Solo 401k has several advantages over SD IRA so if you are eligible for one - I don't see any reason why you would go SD IRA route.
@Joseph Stern I thought with the SDIRA, you could invest most, if not, all of the money into real estate. Am I missing something?
Kenneth,
Yes, you can invest entire balance of your SD IRA. But you personally can't borrow from an IRA, there is no such thing as a loan from an IRA. You can however take a personal loan from 401k.
@Joseph Stern good thought about the Solo401K benefit. Do you happen to know if one can roll SDIRA funds into a SOLO401K? Am I correct in assuming that you can have both a SDIRA and a SOLO401K? Any downsides of a SOLO401K?
Solo 401k has several advantages over SD IRA so if you are eligible for one - I don't see any reason why you would go SD IRA route.
Hi Dimitiry - I've had a Solo 401K for many years, which has been excellent.
I'm a single-member business. The business is growing, and I've considered adding an employee. The Solo 401K holds several investments which utilize debt financing. I'll incur UDFI tax if I roll to an SDIRA. I said, "I'll never have employees," but now I'm finding the Solo-K to be a burden.
As they say "You can't have your cake and eat it"!
If you decide to hire an employees - you simply will lose your eligibility for Solo 401k and have to switch to SDIRA or Checkbook IRA. This is not a "disadvantage" of a 401k compared to SD IRA, it like trying to compare potatoes (that you have in your possession) with oranges (that are growing in your neighbor's yard). Decide what's more important to you - grow your business or maintain Solo 401k. You would have to run the numbers and look at the bottom line, but my guess is that the potential business earnings as a result of hiring employees would be worth paying UBIT tax on leveraged investments in your retirement account. Wishing you wisdom in making this important decision.
Investor · Tampa, FL · Member since 2020 · 287 posts · 152 votes
3y
@Laurie Mohler yes you can roll your funds from a sdira into a solok with no penalty besides a small fee to the custodian. As far as downsides I haven’t experienced any from a single owner perspective I would have to dig a little deeper, but I believe if it’s just yourself on the account this would be the better option.
Investor · Tampa, FL · Member since 2020 · 287 posts · 152 votes
3y
@Kenneth Bentley yes I mentioned that once you create the sdira account you can invest all that money in real estate or any investment you want it could be gold, oil, stocks, a business etc. I myself have bought real estate using a sdira, I was just making the point with a solok you can borrow against that account with no penalty and that’s not the case with a sdira. Both accounts you can use the funds for real estate though to be clear.
Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
3y
It can be very lucrative to invest in Real Estate with a self-directed IRA, but it's important to remember that Fidelity isn't set up to manage these types of accounts. To benefit from the advantages of this type of investing, you'll need to work with a custodian who specializes in SDIRA services. Doing your research and getting familiar with the process through resources like the BP forums is essential before making any moves forward. With so many details and potential pitfalls to navigate, you want to be sure you're well-prepared. Good luck!
Real Estate Professional · Tampa, FL · Member since 2015 · 176 posts · 252 votes
3y
The BIG thing alot of investors miss when investing directly from a Self Directed IRA or 401k, is you can't invest directly in a company you or your spouse are managing. They need to be passive investments.
As an example, if you opened a pizzeria and were the active manager of it, you could not invest your self directed funds in that asset.
If your friend wanted to open a pizzeria, you could use the funds to passively invest in it.
Same principle applies to real estate. To remain compliant, you need to team up with an active partner who is going to manage the investment. Whether it's a house flip, a value add multifamily building, or a commercial retail property, the active manager of the LLC who owns the asset CANNOT be the person who holds the Self Directed Account investing in it.
Back in 2018-2019 this was how I funded most of the flips I worked on. I served as the active partner and managed the flip while individuals with Self Directed QRP's (qualified retirement plans) were able to invest their money passively.
Now, if you're looking for a lender that works with self-directed qrp's, that's a WHOLE other problem . . .