Investor · New York City Metro area, NY · Member since 2013 · 39 posts · 12 votes
Hi BP family!
I've spent months in researching my next move with my 401 (k). I've made the decision that I will rollover my 401 (k) to a self-directed plan which would allow me to start investing in Tax Liens and perhaps consider Private Lending. A major factor is that being self employed gives me the flexibility of making substantial yearly contributions. I'm wondering if anyone has considered or is currently under such a plan and how has it been working for you? I'm still researching companies that would offer major support along the way including having extensive knowledge in real estate and taxes. I welcome your thoughts and perhaps advise me on reputable companies I should be considering. Many thanks!
this is a great decision to be in charge of your retirement funds, if you are willing to put some effort in it - you'll do much better than being in the stock market.
Self-directed Solo 401k plan is a great choice, it will not only enable you to invest in alternative assets, but it is also great tax-sheltering vehicle, allowing you to shelter up to $53,000 per year from your income.
Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes
10y
Yes, I have/am doing this with a solo-401k. Works well, it is also very good to have a Custodian that knows what you are doing and specializes in doing that for investors. Most Custodians will probably refer you to a CPA or attorney for tax questions. My Custodian/Manager is owned by a real estate attorney, so that helps, although his input is limited.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
10y
Good decision, @Martha Chavarria. A self-directed 401k plan with checkbook control is the gold standard in retirement plans and will give you the maximum contribution benefits and financial control. Lending is a great use for a plan like this and is exactly what we do with our self-directed 401k.
We have a plan that does not require a custodian and I strongly recommend that if you will be lending. Custodians tend to get in the way and can slow things down. They can also be expensive. One way to be competitive in the lending world is to be decisive and move very quickly.
Retirement rules and requirements are generally simple if you stick to the basics. You should understand them whether you use a custodian or not. I would not rely on a custodian for real estate or accounting advice.
We have a CPA who is very knowledgeable in retirement plans and, in fact, set ours up for us. We also started using an ERISA attorney for more complicated questions that I wouldn't trust to a custodian anyway. An ERISA attorney is not the same as a real estate attorney so make sure you know what you need.
Many on this board sell SD 401k plans and will likely chime in.
Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
10y
@Martha Chavarria
You could use a solo 401k custodian like Millenium Trust or Provident Trust, or you could use a solo 401k provider that will help you with getting checkbook control over your solo 401k and that will provide on-going legal support.
Yes, one of the great benefits of a Solo 401k is that unlike with an IRA, there is no custodial requirement. What this means to you is that you don't have to be subjected to the additional cost and administration of an LLC in order to have checkbook control. As others have mentioned this checkbook control can be key for the type of investing you're talking about doing. There are many other benefits the Solo 401k offers over an IRA LLC (another structure that can give you checkbook control of your retirement funds). Do a little research and see what will work best for your needs. BP is a great place to ask questions.
this is a great decision to be in charge of your retirement funds, if you are willing to put some effort in it - you'll do much better than being in the stock market.
Self-directed Solo 401k plan is a great choice, it will not only enable you to invest in alternative assets, but it is also great tax-sheltering vehicle, allowing you to shelter up to $53,000 per year from your income.
Real Estate Investor · Miami Beach, FL · Member since 2016 · 16 posts · 8 votes
10y
@Martha Chavarriawe are also researching which company to go with and came across this blog entry I thought was very clear and concise and clarified some things for me so we don't spend big bucks using custodians. hope it's helpful!
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
10y
@Martha Chavarria I have had a SOLO 401K for a few years now. It has been an excellent tool. I use mine for doing HML with very good results. I am funding two deals on Monday and one is a fellow BP member. I don't hold RE inside of the plan because you lose the major tax advantages of RE if you do so. Considering that, doing HML made perfect sense. I have done several loans that had annual yields over 30%. Can't find that in equities...and in equities you have -0- control.
Involved In Real Estate · Austin, TX · Member since 2014 · 46 posts · 12 votes
10y
@John Thedford- I was just thinking about that and then read your comment.. My thought was, yeah but what about all of the tax benefits you get with real property .. BUT if I could set up a SD solo 401K and buy notes, or do HML ... seems to make tons of sense!
Great thread.. I'm reading all of them on SDsolo 401Ks
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
10y
@Lori Vines if you hold RE outside your retirement account you get all the tax benefits. Don't forget, you can 1031 out of any investment real estate and defer the gains too. You cannot do that inside a retirement account. This is why I do HML inside my 401K. There are no real tax advantages to HML so why not defer the gains? This gives you the best of both worlds.
While your reasoning is entirely solid, it may not apply to all investors. Yes, there are tax advantages to investing in real estate with non-qualified funds. However, when looking at the qualified fund portfolio, many investors will just look at the risk/reward value of investing in a particular asset class with those tax sheltered plan dollars. If you can get better overall return on investment with notes, or with leveraged rental property, or with venture capital, or whatever it might be, the only real comparison that makes sense is how - within the tax framework of the retirement plan - you can get the best results. Comparing the plan to non-plan investments really does not make a whole lot of sense.
Now, for an investor with enough capital and experience to look at overall portfolio allocation including both retirement funds and non-qualified funds, it starts to become a different story. Then yes, if your focus is real estate and you have both types of money to deploy, and the net return on investment will be roughly equal, then diversifying and having real property outside a plan and notes inside the plan may make sense.
My real point is that avoiding holding rental property in a retirement plan simply because it is not tax advantaged in the same way as that same real estate outside a plan makes no sense. The plan is what the plan is from a tax perspective, and therefore just seeing the best possible return on investment for the plan regardless of the asset class is the right approach.
Professional · Lexington, MA · Member since 2016 · 136 posts · 43 votes
10y
@John Thedford: In addition to what @Brian Eastman has pointed out (i.e. looking at the larger portfolio allocation), there is also the aspect of goals of an individual. For example, if a goal is to buy your final true retirement property, but buy it in ones early years, it could still be bought and rented within the retirement account and then appropriately distributed for personal retirement use. Again keeping in mind, choice are to be made when taking into account a holistic approach.
This is where sometimes working with a qualified and knowledgeable professional does bring this into perspective.
Fredericksburg, VA · Member since 2016 · 190 posts · 64 votes
10y
Good discussion as I am looking to move some of my IRAs into an asset class that will give me access to do REI. So @Mark Nolan brings up a point. Does it make any difference whether one uses traditional or Roth 401k assets?
RE Investor · San Diego, CA · Member since 2015 · 119 posts · 18 votes
10y
I am ready to lose my job of 18 years and wanted to roll over my 401K into a solo 401K to finally get into RE. But I was hoping to make this my full time self employed business, but how can I make money to live on if everything has to go back into my solo 401K?
A Solo 401k is simply a means to diversify tax-sheltered retirement savings, and does not provide a mechanism for you to draw income unless you are over age 59 1/2.
An alternative tool that you may wish to evaluate is a Rollover as Business Startup (ROBS plan).
In this plan format, you can establish an operating business that you are directly involved in and can draw a salary from the business. The retirement plan associated with the business can become a shareholder of the business, allowing you to use your existing savings to capitalize the business.
The business would need to be an active product or service. This works for real estate in the new construction or flipping realms, but not for holding passive rentals or notes.
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
10y
@Patrick Shawn Faherty Yes, Roth and non-Roth funds different tax treatment, so there will be a difference between the funds types. Many 401k providers allows for both pre-tax and Roth funds in the same plan, however.
The Solo 401k is an investment account for your retirement funds. It is not your business and is not intended for you to live off the funds now, but instead is meant for you to build funds for use later (in retirement when you are no longer working).
You'll need to have some self employment activity before setting up the Solo 401k. If you have active real estate investments in your name and setup a Solo 401k plan for income from that activity and decide to do passive real estate investments with the plan, for instance, that is ok. It's just that the plan cannot serve as your self employment activity itself.
A passive investment is one where your main activity is the investment of money and the income comes as a result of that investment. Purchasing stock in McDonalds and receiving profits from that investment would be an example of a passive investment. If you opened your own McDonald's and worked shifts as a manager, that would not be so passive. You would be generating some earned income.
The same can be true of real estate. If you purchase a rental and find a tenant, the rental income is generally passive. If you purchase a fixer upper, go in and do repairs and renovations and sell the property, the income is more likely to be active/earned income.
Your self employment activity should be active while your retirement account activities are generally better suited for passive investment. Another example of a passive investment would be funding a loan from your Solo 401k to a real estate investor who uses the funds for a fix and flip. Your Solo 401k would receive profits back as a result of the loan to the investor.
Be sure to speak with a qualified tax advisor for more information on passive vs active investments and their ramifications before taking any action.
Investor · Canton, GA · Member since 2014 · 727 posts · 500 votes
9y
I have an LLC set up for holding property. I am thinking of setting up another for holding my rental properties exclusively.
Can I use a Solo 401K to lend to my LLC to fund purchase/rehab, then pay back the 401K when I sell (flip) or refi (rental hold)? Can I use the the 401K to shelter flooring income, I think up to $53,000 or year?