The Best type of Retirement Plan for a New Investor

Tax, SDIRAs & Cost Segregation
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The Best type of Retirement Plan for a New Investor

Conor Lehane
Plano, TX · Member since 2013 · 12 posts · 0 votes

I rolled over a traditional 401k from my previous employer to a Roth IRA at American Pension Services recently. I wont go into recent events since im sure most of ye are aware but I have now cancelled my account and am back to square one.I took the 1st option given to me and it backfired.
My thinking now is what do I need for my specific needs?
Recently moved to Dallas area and working with a mentor and a team of new investors so working aggressivly to generate deals.
I have read the posts here but my immediate feeling is that responses are from very seasoned investors with obviously different needs.
My 401k provider is waiting for me to give them a new custodian to send a check.
Any advice is appreciated for a new investor to get on the Self Direct ladder. Also im not rolling over a huge ammount of money if that makes a difference.

Thanks in advance
Conor

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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
12y

@Conor Lehane

With SD IRA there is always custodian involved. Alternative to that would be using truly self-directed Solo 401k, where there is no custodian, you serve as a trustee of your own plan, have checkbook control and bunch of other benefits:

  • Solo 401k offers Participant Loan Feature which allows you to access your retirement funds any time for any reason (example would be investing in a transactions that would be otherwise prohibited). It's like creating your own bank that will never turn you down. Some may never use this feature, but it is sure great to have this option. With an IRA you canâ??t touch your money until you are over 59 1/2 and if you do - you are taxed and penalized heavily!
  • Roth Solo 401(k) - you can maintain additional, separate 'bucket' under your Solo 401(k) plan where you could make after tax contributions, thus, investing tax free for the rest of your life. The limit on Roth contribution in Solo 401k is up to $23,000 (compared to $6,500 in Roth IRA) and there is no income restriction on contributions unlike with Roth IRA. Also, pre-tax portion could be converted into after-tax (Roth). (Tax professional should be consulted prior doing so).
  • With Solo 401(k) custodian is not required. The plan can be self-administered which could mean significant savings $$ on custodian, transactions and asset based fees that would be there in a case of SD IRA. You also have a checkbook control and dont have to obtain custodian consent when making investments. This could be huge on time-sensitive investments and give great level of convenience.
  • Large contribution limit of up to $57,000 (significantly higher than an IRA, which is only $6,500). In additional to all other benefits mentioned above, Solo 401k is a great tax-sheltering vehicle, allowing you to shelter huge amount of money from taxes.
  • When you use financing to acquire real estate in a SD IRA, the portion of the income from the property will be subject to UDFI tax (type of the UBIT of about 35%)! When you finance real estate inside of Solo 401k -?? it would be exempt from UDFI, which makes it even more attractive to use for real estate investment with leverage.

Solo 401k subject has been discussed here on BP in details many times and you can find a lot more info and learn about the experience of those who used it.

Keep learning, there is lot's of great resources here on BP!

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    12y

    @Conor Lehane

    With SD IRA there is always custodian involved. Alternative to that would be using truly self-directed Solo 401k, where there is no custodian, you serve as a trustee of your own plan, have checkbook control and bunch of other benefits:

    • Solo 401k offers Participant Loan Feature which allows you to access your retirement funds any time for any reason (example would be investing in a transactions that would be otherwise prohibited). It's like creating your own bank that will never turn you down. Some may never use this feature, but it is sure great to have this option. With an IRA you canâ??t touch your money until you are over 59 1/2 and if you do - you are taxed and penalized heavily!
    • Roth Solo 401(k) - you can maintain additional, separate 'bucket' under your Solo 401(k) plan where you could make after tax contributions, thus, investing tax free for the rest of your life. The limit on Roth contribution in Solo 401k is up to $23,000 (compared to $6,500 in Roth IRA) and there is no income restriction on contributions unlike with Roth IRA. Also, pre-tax portion could be converted into after-tax (Roth). (Tax professional should be consulted prior doing so).
    • With Solo 401(k) custodian is not required. The plan can be self-administered which could mean significant savings $$ on custodian, transactions and asset based fees that would be there in a case of SD IRA. You also have a checkbook control and dont have to obtain custodian consent when making investments. This could be huge on time-sensitive investments and give great level of convenience.
    • Large contribution limit of up to $57,000 (significantly higher than an IRA, which is only $6,500). In additional to all other benefits mentioned above, Solo 401k is a great tax-sheltering vehicle, allowing you to shelter huge amount of money from taxes.
    • When you use financing to acquire real estate in a SD IRA, the portion of the income from the property will be subject to UDFI tax (type of the UBIT of about 35%)! When you finance real estate inside of Solo 401k -?? it would be exempt from UDFI, which makes it even more attractive to use for real estate investment with leverage.

    Solo 401k subject has been discussed here on BP in details many times and you can find a lot more info and learn about the experience of those who used it.

    Keep learning, there is lot's of great resources here on BP!

    1Reply
  • Conor Lehane
    OP
    Plano, TX · Member since 2013 · 12 posts · 0 votes
    12y
    Thanks for the info Dmitriy. It's making my decision a little easier. Do all the aforementioned companies on previous threads (Equity Trust , UDirect etc )provide a Roth Solo 401k ? Also since I have been taxed already from the first rollover, can I be taxed again setting up with a different company?
    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    12y

    @Conor Lehane

    make sure that you understand the difference between 401k held with custodian vs. trustee-managed 401k (Solo 401k does not require a custodian).

    I am not sure if I fully understand your situation regarding APS and your 401k provider... but if you paid taxes on Roth conversion already, you will not pay again if you do the transfer.

    Please note that Roth IRA is not allowed to be rolled into Solo 401k. You can move funds from Traditional IRA into Solo 401k, and then do the conversion.

    Feel free to contact me so we can talk about details of your situation.

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    12y
    Originally posted by @Dmitriy Fomichenko:
    @Conor Lehane

    With SD IRA there is always custodian involved. Alternative to that would be using truly self-directed Solo 401k, where there is no custodian, you serve as a trustee of your own plan, have checkbook control and bunch of other benefits:

    • Solo 401k offers Participant Loan Feature which allows you to access your retirement funds any time for any reason (example would be investing in a transactions that would be otherwise prohibited). It's like creating your own bank that will never turn you down. Some may never use this feature, but it is sure great to have this option. With an IRA you canâ??t touch your money until you are over 59 1/2 and if you do - you are taxed and penalized heavily!
    • Roth Solo 401(k) - you can maintain additional, separate 'bucket' under your Solo 401(k) plan where you could make after tax contributions, thus, investing tax free for the rest of your life. The limit on Roth contribution in Solo 401k is up to $23,000 (compared to $6,500 in Roth IRA) and there is no income restriction on contributions unlike with Roth IRA. Also, pre-tax portion could be converted into after-tax (Roth). (Tax professional should be consulted prior doing so).
    • With Solo 401(k) custodian is not required. The plan can be self-administered which could mean significant savings $ on custodian, transactions and asset based fees that would be there in a case of SD IRA. You also have a checkbook control and dont have to obtain custodian consent when making investments. This could be huge on time-sensitive investments and give great level of convenience.
    • Large contribution limit of up to $57,000 (significantly higher than an IRA, which is only $6,500). In additional to all other benefits mentioned above, Solo 401k is a great tax-sheltering vehicle, allowing you to shelter huge amount of money from taxes.
    • When you use financing to acquire real estate in a SD IRA, the portion of the income from the property will be subject to UDFI tax (type of the UBIT of about 35%)! When you finance real estate inside of Solo 401k -?? it would be exempt from UDFI, which makes it even more attractive to use for real estate investment with leverage.

    Solo 401k subject has been discussed here on BP in details many times and you can find a lot more info and learn about the experience of those who used it.

    Keep learning, there is lot's of great resources here on BP!

    Great Summary Dmitriy. The reasons listed above is why I preferred a SD solo K over a SDIRA as well. The key points I liked was that normal Roth IRA contributions are capped by income limits while the roth soloK is not.

    0Reply
  • Loren Whitney
    Investor · North Idaho · Member since 2011 · 332 posts · 107 votes
    12y
    Conor Lehane Good morning! Anyone on the board will agree that the individual 401k offers a maximum feature set. That being said, I think your thread was launch in one direction without giving a fair comparison of the IRA vs. 401k structure. Before you jump the gun into anything, there are several considerations: 1. Just for clarification, have you already performed a Roth conversion on the movement from the 401k to the Roth IRA? It sounds like that may not be the case but you mentioned a rollover has been completed so I'm double checking. 2. Do you qualify for an Individual 401k? You must be self-employed with earned income, not just passive income. Be sure to check with your CPA to be sure you qualify. Furthermore, if you plan to hire actual employees, not contractors, there are more questions to ask. 3. Is the 401k structure right for you? How much work would you like to take on in terms of administrating your own retirement plan? If you're a total do-it-yourself kind of guy, a self-trusteed 401k does allow you to perform all administrative functions related to the plan and it's investments. What if you hate bookkeeping? No problem, you can still use an individual 401k. There are plenty of administrators out there that will take on the recording keeping role for you if you'd prefer to pay someone for any single investment. You can always use the IRA structure until things progress and let someone else play the custodial role. If you select an IRA instead of a 401k, the record keeping, cash flow administration, and IRS reporting is usually all provided by the IRA provider. This is (in my opinion) the easiest way for the average person to self-direct their retirement. There are checkbook models that give you direct control but they represent gray areas in IRS law. 4. What's more important to you, your time or money? The 401k will take up more time doing the work yourself but potentially save money. Be mindful that it's not uncommon to spend money consulting an ERISA attorney because after all, this is all new. The IRA will cost you more money in the long run but you won't have to do as much admin work. The rules are also much stricter in terms of personal involvement so it's harder to make a mistake on anything admin related. You also have to count on an IRA provider to offer you fast and accurate service to make it all work on your own timeline. Hopefully this gives you some more fuel to make a decision. I look forward to contributing more where possible. Thanks!
    0Reply
  • Conor Lehane
    OP
    Plano, TX · Member since 2013 · 12 posts · 0 votes
    12y

    Thanks for the rundown Loren. Much appreciated.

    I originally set up a Roth IRA with APS and I closed my account with Fidelity( had a trad 401k with previous employer). In between the time Fidelity sent me a check (after tax)made out to APS , all this SEC drama kicked off and so had to close that account too. I'm now essentially in a position where I have to find a provider and tell Fidelity to rewrite a check in their name.

    Im not self employed so the solo 401k is out for the time being. To answer your question Loren I think time will always be more important. Maybe another Roth IRA is my best soloution this moment in time. Just a matter of finding a provider with low process and annual fees and I can put this to bed and concentrate on generating some cash to put in it.

    0Reply
  • Loren Whitney
    Investor · North Idaho · Member since 2011 · 332 posts · 107 votes
    12y

    Conor,

    I'm agree about the time factor. I'd much rather pay a bookkeeper than do things myself - that's just me though. haha

    I won't mention anyone specific but I'll just say that when looking at self-directed IRA providers, be sure to find one that doesn't charge you annual fees on uninvested cash. That's an easy way to start paying for fees before you actually have a chance to find a deal and move forward.

    I'm available if you'd like to chat further. We should connect as colleagues regardless. Always good to connect with like minded people.

    Cheers!

    0Reply
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