Self Directed IRAs, pros and cons?

Question

I am really interested in rolling my 401k into a self Directed IRA. Has anyone done this? How did it go?

Mitch Messer · Answer

Hi @Krystle Stephens and welcome to BiggerPockets!

Yes, I've done the SDIRA thing and recommended many others do the same, with the BIG caveat that you must get trained to use this powerful tool properly. The penalties for misuse and ignorance are devastatingly high!

My strong recommendation is that, before you take another step, you seek out the SDIRA training offered by Dyches Boddiford and Pete Fortunato. I've attended myself and intend to repeat as soon as they set another date.

For the record, I receive ZERO compensation for making this recommendation. I'm just a satisfied client!

Taylor L. · Answer

I have. It's going well. However, after recent conversations with experts, I'm probably going to be shifting to a checkbook control IRA. It looks to be far more fee-efficient.

You're going to get people telling you that UBIT is a major downside. I disagree. I don't like paying taxes any more than the next guy, but you're not paying taxes on the returns generated by your funds - you're only paying taxes based on the returns from other people's money (debt).

Justin Windham · Answer

@Krystle Stephens

Many BP members use SD IRAs and Solo 401k plans to invest into real estate. If you have self-employment activity, the Solo 401k might be an option for you.

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

*You can borrow up to $50k from the plan; IRAs do not allow participant loans

*There is no custodial requirement for the 401k.

*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.

*The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)

Dmitriy Fomichenko · Answer

@Tony Robinson

Not lending to family and friends, I want to maintain good relationship with them. I work with a broker who brings deals to me, so the borrowers are completely unrelated third parties. This is asset-based lending, property is the security for the loan.

Brian Eastman · Answer

@Barry Mohler

If you wish to use the 401(k) funds personally, then your only option is to take a taxable distribution from the 401(k).

A self-directed IRA would not allow for personal use.  With such plans you are still keeping the funds in the tax-sheltered retirement framework, and may not personally use the funds or benefit via plan activities in any way.  It is just about diversifying the IRA.

Daniel Dietz · Answer

@Krystle Stephens @Taylor L. summed it up very nicely.

My 3 partners and I use both SDIRAs and SOLO401Ks (need to have self employment income for this) to invest in buy and hold rentals.

We rolled the vast majority of the funds from our existing IRAs that we had and have added a little bit since. One of the main reasons we did this is that we were tapped out of 'cash on hand' to buy more rentals, and the IRAs are where probably 90% of our assets were.

I agree that educating yourself is HUGE to make sure you do things right. I perosnally would not even think about doing rentals without a 'checkbook control' type of set up.

I assume you know that you would very likely need to leave your job where the 401K is at to be able to roll it over?

Costin I. · Answer

@Krystle Stephens - if you have or can generate self income, look into Solo 401K - it beats all the other SDIRA alternatives by far. The only negative I know is that you can't roll Roth IRA into the Solo Roth 401K component.

Tony Robinson · Answer

@Dmitriy Fomichenko

Thanks for the input! Where are you finding individuals that your trust to loan money to on the real estate deals? Are you lending to friends and family? As I understand it, you can’t use the funds in your own deal.

Dmitriy Fomichenko · Answer

@Krystle Stephens

Own couple rentals in mine and done couple dozen private loans. Great way to grow wealth in tax-deferred environment.

Barry Mohler · Answer

Related question, hoping I’m in the right forum. As I understand my 401K only allows me to make a withdrawal and I am 62 yrs old and still working at this location. If I withdrawal from 401 K can I move into a situation where I can use this money to fund buying my retirement home which I will not live for a few years without a taxing event?

Self Directed IRAs, pros and cons?

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