Rochester, NY · Member since 2014 · 24 posts · 0 votes
We are getting ready to purchase our first investment property, a single family house to rent, using a self-directed Solo 401 K.
At first I was leaning toward having checkbook control, but the cost for a custodian-managed account is reasonable, and I am thinking it might be good to have a custodian take some responsibility for paperwork and banking.
What are the disadvantages of using a custodian, other than the slightly higher annual cost? The one I'm considering does not charge per check, so that is not a concern. I assume I can get checks issued very quickly if I am making an offer on a house.
Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes
12y
@David B. make sure you account for the time delay it takes for you to request the custodian to take action and it actually getting done. For example if you need to pay contractors for rehab work performed you will have to send a request to the custodian, they will have to process your request, mail out the check, it can take days/weeks. Now imagine if you were in a competitive bidding war for a property you would face similar waiting period whereas someone with their self-managed Solo 401k could write a check on the spot!
Do you already have a solo(k) established or are you still at square one?
Checkbook control, among other great benefits are the selling points for the Solo(k) plan. If you're interested in letting someone else do the recordkeeping for you, analyze their technology and customer service. Those will be the two critical factors in making your life easy or difficult.
1. Do they offer a full online bill pay system? (probably most important for speed)
2. Do they accept rental income from tenants online? Do they charge for it?
3. Do you like their online account portal?
4. Do they assign you a personal representative to answer questions and work through time sensitive situations?
If you have in-depth questions, I'm happy to help more. Good luck with your upcoming investment!
Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes
12y
@David B. make sure you account for the time delay it takes for you to request the custodian to take action and it actually getting done. For example if you need to pay contractors for rehab work performed you will have to send a request to the custodian, they will have to process your request, mail out the check, it can take days/weeks. Now imagine if you were in a competitive bidding war for a property you would face similar waiting period whereas someone with their self-managed Solo 401k could write a check on the spot!
Investor · North Idaho · Member since 2011 · 332 posts · 107 votes
12y
Also mind that if your plan isn't the sole owner, the accounting nightmare becomes more complicated having to deal with partial amount payments. It's not the end of the world but difficult when others can hand over a check today and you're having to tell people to wait.
Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes
12y
IMHO, not sure why anyone would opt to use a custodian for a solo 401(k) unless you were just having someone like Fidelity manage traditional investments. People use them for SD-IRAs because the law mandates it, but with a 401(k) why add a level of complexity? Just my two cents -- tax deferred of course :)
IMHO, not sure why anyone would opt to use a custodian for a solo 401(k) unless you were just having someone like Fidelity manage traditional investments. People use them for SD-IRAs because the law mandates it, but with a 401(k) why add a level of complexity? Just my two cents -- tax deferred of course :)
This is what I'm trying to figure out. I was hoping that using a custodian might actually remove a level of complexity, by having them manage some IRS and banking and paperwork stuff.
Since I will be out of town from the property and won't be able to write checks on the spot anyway, I figured what's the difference who writes them as long as they get sent out right away. I realize this time factor is very important.
Thanks for the replies. I appreciate any further insight.
when using truly self-directed Solo 401k you don't need a custodian, which mean that the process is actually simplified. You have direct access to your funds without having to go to third party. You don't have to personally write the check if you need to pay a repair bill, use online banking and schedule the payment from anywhere in the world.
@Phil G. made a good point, I also don't see any reason why you would want to use a custodian for a Solo 401k (unlike an IRA where custodian is required by law).
The level of complexity that your talking about in your comment above is actually removed with truly self-directed Solo 401k.
There is some benefit to using a Custodial Plan - it makes much harder for the participant to engage in a prohibited transaction. From a paperwork perspective there's probably not much benefit to a Custodial Plan, though.