Escaping a self directed investment account

8 Replies

I am in the process of moving several 401k and IRA accounts into a Solo 401k. This is a bitter sweet for me because it means I can begin investing in flips but also mean I cannot be materially involved in the improvement. This is tough for me because I'm a hard core DIYer who cringes at the thought of paying someone to do the same work I can do. Solo 401k investing also means all revenue needs to go back into the account.

This is fine if I'm only interested in long term growth on that account. Not so good if I want to liquidate some of that money or start participating in the flips in a hands on way.

I'm looking for creative ways to transition from my Solo 401k to a less restrictive investment platform. Aside from cashing out a portion or all of that account and taking the tax hit, does anyone have any strategic/alternative suggestions?

@Craig Leininger

A rollover as business startup structure would allow you to create a real estate development company and capitalize that business using tax-deferred retirement funds without taxes or penalties.  You can be an employee of the company as well as a shareholder via your retirement plan.  This allows you to be directly involved in the activities of the business and take a salary.  

Unlike a self directed IRA or 401k where the investments are at arm's length and all returns accrue tax-sheltered back to the plan, this business will operate in the taxable realm. There are ways you can structure the income of the business for tax -sheltering and retirement plan growth, but the primary focus is the capitalization of the business.

Originally posted by @Craig Leininger :

I am in the process of moving several 401k and IRA accounts into a Solo 401k. This is a bitter sweet for me because it means I can begin investing in flips but also mean I cannot be materially involved in the improvement. This is tough for me because I'm a hard core DIYer who cringes at the thought of paying someone to do the same work I can do. Solo 401k investing also means all revenue needs to go back into the account.

This is fine if I'm only interested in long term growth on that account. Not so good if I want to liquidate some of that money or start participating in the flips in a hands on way.

I'm looking for creative ways to transition from my Solo 401k to a less restrictive investment platform. Aside from cashing out a portion or all of that account and taking the tax hit, does anyone have any strategic/alternative suggestions?

Craig, I have couple comments for you:

1. You can use a Participant Loan feature of the Solo 401k to borrow up to $50K from your account. This is a loan which has to be paid back over 5 years using amortized payments. But the proceeds are yours to be used as you wish. Invest in a flip, do the work yourself, keep all the gains and profits to yourself (pay taxes on it) and just pay back the principal on the loan plus interest.

2. I understand that you are 'hard core DIYer', but maybe it's the time for you to look at using other people's skills and resources to do the work. If you continue doing it all yourself - you are really limiting your growth potential. There is limit to how much work you can do in a day, but not so when you outsource. That is what I did too when I got started in REI 15 years ago. I did almost 100% of the work on several of my first fixers. But I can't imagine doing is myself now. My time is way more valuable than what I can pay someone to put new flooring or replace an appliance or install new door, etc. Consider shifting your mentality and valuing your time at say $100/hour then you will not have reservations paying someone $15/h to do some work for you.

3. Flipping properties in your retirement account is most likely will be considering as running active business and will subject all gains and profits to Unrelated Business Income Tax (UBIT) at about 40%. Be sure to take this into consideration and talk to a qualified expert before you proceed.  

Dmitriy Fomichenko, Broker
(949) 228-9393

Gentlemen, thank you for your feedback.

What would be involved in transitioning from a Solo 401k account to a ROBS?

out of curiosity i started looking around about ROBS; of course all solid businesses require good planning, but still a good read as many RE investors do not operate as a C corporation.

http://www.newsweek.com/2014/08/15/rollovers-business-startups-401k-cashing-your-401k-using-401k-start-business-small-262633.html

@Irene Struif

I would point out that the author for the Newsweek article has no background in business, finance or taxation.  This is an eyeball-grabbing piece of fluff by Newsweek with little real substance.  The author just went out and did a little internet research and made a few phone calls.

As with any tax or business strategy, there are successes and failures.  Business start-up is a risk no matter how you fund the business.  Even if you are good at something, outside factors can change the landscape and create challenges.

There are also ROBS plan providers who know what they are doing and have a 100% compliance record, and conversely there are marketing companies providing legal documents without the true capacity to truly support such plans.  

The article points out that Guidant has been offering those plans for some time, but neglects to mention that they were one of the companies looked at seriously by the IRS and they were found to be not quite right in everything they were doing.  They took the plan off the market for several months, retooled, shook up the management team a bit, and have been doing a better job of things since.

The ROBS plan has been around since 1983.  If implemented and maintained properly - which means support from a quality firm - there is little risk of IRS compliance issues.

Should someone take their entire nest egg and bet it on a new business?  Perhaps not, but people do all the time - whether that nest egg is a retirement plan, after-tax savings, equity in their home, or family money.

My point, I suppose, is that while pointing out that starting your own business is risky has merit, extrapolating that to say the ROBS plan in and of itself is risky is a stretch.  If you plan well, engage the right professionals not only to implement the ROBS plan but to guide you in your business and tax strategy, and respect the fact that there are rules to be followed, this funding strategy is no more or less risky than any other.

The idea that folks are pillaging their retirement plan to start the business is more risky than other methods also misses a key point.  Many folks who are failing in a business funded by other means will drain their retirement plan trying to save that business or stave off bankruptcy - so the retirement plan gets hit there too.  Again, entrepreneurship is messy. Read the biographies of the titans of business and there are many, many cases of failure before success.  It goes with the territory. 

In fact, one of the biggest reasons that most businesses fail is debt. If you self fund your business from your retirement plan and do not have debt, that increases the odds of success in many situations.

So, as with so many of the topics we discuss here on BP, consult with multiple professionals who are actually licensed in the field before forming too much of an opinion on a strategy or engaging a firm to provide services. 

Use the right tool the right way and your chances of success are high.  Use the wrong tool for a job, or use a tool the wrong way and you can lose a finger.

well, i started out with the statement that all businesses require planning and of course all businesses are a risk; what caught my eye was the need for C formation; not that its better or worse, i just haven't met anyone who does a lot of RE investing from a C corp, mostly LLC's and one S corp. you seemed to have assumed i have not read any counts of successful entrepreneurs but i have. in fact, i have been studying the behavioral structure of success people for over 20 years. sorry if i touched a nerve, i was just noting the required corporate structure. i personally would find it cumbersome.

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