Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
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@John R., Sense Financial doesn't list interest on deposits because they don't hold the funds. You can put the funds anywhere you choose to--anywhere that can open a trust account. Mine are at my local bank. I was very pleased with the assistance I received at Sense Financial. I set up the Solo 401k account a couple months ago and I am expecting my second deal to repatriate funds tomorrow. It is a pleasure not having to deal with custodians in this account.
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Account Closed
It really is pretty fantastic.
Two "catches".
You do need to qualify by being self employed and having no full time employees in any company you control, and this situation needs to have some longevity.
You need to be very cognizant of IRS rules both with regards to plan administration and investments.
Both are very manageable, especially if you work with experienced professionals in the field. Pre-paid legal and cookie cutter services like zoom and rocket simply do not have counsel on staff with specific experience in these areas. In fact, we find a lot of folks with HNW and solid legal counsel, but none-the-less counsel that is not specifically familiar with the use of retirement plans for non-traditional asset investing.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
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Originally posted by @Account Closed:
it sounds like you can roll over your real estate business into a solo 401k plus your IRA then proceed as a business entity?
Steven, you can only rollover most qualified retirement plans except Roth IRA into Solo 401k. There is no such thing as rolling over your existing real estate business into Solo 401k or using Solo 401k to invest in your existing business.
All transactions of the 401k must be 'Arm's length' to you personally or to your business.
Investor · Lake Oswego , OR · Member since 2015 · 81 posts · 33 votes
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Thanks for the great information on this post. I have been working through questions on setting up a self directed 401k for the last two weeks. Trading emails with both Mark Nolan and Dmitri Fomichenko for this.
I thought I was pretty close to getting this going then I found this one statement from Pensco Trust's website that puts a big question in my plan:
"Maintenance and repairs must be done by a third party. If the IRA owner provides any “sweat equity” activities – even something as minor as changing a light bulb — there could be significant penalties."
This statement seems to fly in the face of any buy and flip project or pretty much any real estate activity where you would put in any personal effort. Anyone have issues with this?
the statement is correct, you are prohibited from doing any work on the property yourself, provide any services to your IRA/401k or receive any personal benefits.
All transactions involving your retirement account must be 'arms length'.
Sweat equity is absolutely prohibited in an IRA or 401k plan. The retirement funds are tax sheltered, and the trade off is that there can be no direct or indirect benefit between the plan and a disqualified party (in either direction).
If you were to add value to the plan's investments, you clearly could not receive compensation.
If you were to add value without compensation, then you are giving the plan free labor, and effectively making undocumented contributions to the plan. This would be a violation of IRS rules.
You can invest in real estate, including flip transactions with IRA or 401k funds, but must think more like a fund manager than a guy with a hammer.
Keep in mind, flipping is a business activity and as such incurs UBTI taxation within a retirement plan. This can still produce favorable net return on investment, but you certainly want to be sure you understand the tax ramifications.
This statement seems to fly in the face of any buy and flip project or pretty much any real estate activity where you would put in any personal effort. Anyone have issues with this?
Flipping property out of your 401k most likely will be considered as active business and will subject all gains and profits from this activity to UBIT (Unrelated Business Income Tax). Be sure to consult with the knowledgeable tax expert such as @Nathaniel Busch on the subject before engaging into any transaction.
Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
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If you are looking to flip properties, you may want to consider the Rollover as Business Startup or ROBS 401k. The business can be setup as a real-estate operating company and thus not be subject to UBIT.
Powder Springs, GA · Member since 2015 · 4 posts · 1 vote
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I used Robert Hubbard at Safeguard financial (I think the website uses Safeguard CP). They did everything for me. I pay the fees for document maintenance to a law firm who works with them regularly. Have had to call them a few times with questions while establishing the bank account and they have been very helpful and responsive to any questions. They also do the self-directed IRA's.
Very happy that I made this decision because of the increased investing options, AND the ease of changing my mind. Ultimately, after a few years of dabbling in some fun investments, I've decided I will pull out money from the account and pay the tax/penalty BEFORE I invest in RE.
This was a recent decision after listening to guest on this show that mimicked something I had heard several times on the Del Walmsley show. It finally just made sense, I guess.
I'm not a financial advisor and don't know your situation or investment plans... just noting that if you expect the value of your investment to increase, AND you want access to that increase now AND you want to reduce the limitations/risk you will have by investing inside the solo 401k... then paying the 40% tax penalty now may actually end up being favorable in some cases.
Definitely take back control of your money, but don't rule out paying the tax/penalty just because it SOUNDS and feels horrid.
Central Coast, CA · Member since 2012 · 26 posts · 0 votes
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My plan is to purchase property below market, possibly with owner financing, have minimal rehab done, and carryback owner financing on a sale. I'd like to find out more about note investing and do that as well.
Does this qualify for a solo 401k, or would this be considered flipping?
Rental Property Investor · Yorba Linda, CA · Member since 2012 · 336 posts · 69 votes
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John, if you qualify for a solo401K you can use the plan to buy and flip a property. You do run into tax issues if you run a business out of your solo401K, flipping one home would not be considered a business but doing it on a regular basis is another story. I have some experience but I am not an expert and before you proceed you need to talk to an expert.
My plan is to purchase property below market, possibly with owner financing, have minimal rehab done, and carryback owner financing on a sale. I'd like to find out more about note investing and do that as well.
Does this qualify for a solo 401k, or would this be considered flipping?
Hey John,
Just to be clear, there is no issue with flipping houses in your IRA/401k. The issue is you can't provide sweat equity, or in other words you can't do the work personally or hire a company you own to do the work etc. You can by all means make management decisions about the property, i.e new counters, bathroom remodel, etc. but you have to have a 3rd party do the work.
What you're describing sounds like it might work in an IRA, but IRAs can only have non-recourse debt, you personally can't guarantee any loans, so be warry of that. In terms of note investing, its very common in self-directed retirement accounts.
Rental Property Investor · Yorba Linda, CA · Member since 2012 · 336 posts · 69 votes
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John,
If you run a business in your IRA you will have tax issues, if you use non recourse loans in your IRA you will have tax issues. In some cases these issues are mitigated in a solo401K plan as the IRS rules are different. Just don't rely on us amateurs giving you on line advise, check with a real expert in the field before you put your money at risk.
Richland, WA · Member since 2015 · 7 posts · 1 vote
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I am planning to convert a company 401k plan from a previous employer to a solo 401k plan and purchase a single family home as a rental with those funds. I currently own and manage 2 properties and am a real estate professional. I understand that the rules on working on or adding value to a property purchased through a solo 401K plan are pretty clear. You can't. The info on managing these properties seems to be less clear. Can I act as an uncompensated property manager for this property? Typical duties being advertising, receiving screening results from screening companies, collecting rents, ordering & paying for maintenance etc? What is the consensus here on me doing that? All help appreciated!
The IRS has not provided the kind of specific guidance we would like. As such, there is a range of opinions on a topic such as this.
What we are working from is the prohibition of a disqualified party providing benefit to the plan through the provision of goods or services.
The conservative approach would be to not do anything other than make decisions, hire vendors and handle expense/income transactions. That is probably extreme, but would guarantee and audit-proof position.
Administering the assets of a plan is something you are allowed to do as the plan trustee. One could argue that minimal property management roles such as placing advertising, screening tenants and things of that nature fall into this category, and there is a lot of support for that within the tax community You clearly cannot compensate yourself for such activities, and you would not want to end up in a situation where a significant amount of time and energy goes into these activities or you could be viewed as providing services to the plan. Handling a single family home or two is very different from managing a 10-unit apartment complex.
It is always best to think of yourself more as a fund manager deploying capital than a "real estate investor" when operating your plan.