How to setup,cost,strategies?

9 Replies

Hello everyone wanted to ask a few questions in regards to setting up a SDIRA. I have a 401k with one of my employers not much money in it only like 2 years old. I wanted to setup a SDIRA when I do my first investment but wanted some more information on the subject.

1.)For starters how much is it to setup a SDIRA with a LLC?

2.)Can you borrow money against a self-directed IRA to invest and are there any downsides to this?

3.)How much can I contribute to an IRA from my paycheck?If so does the money come out pre-tax to reduce the amount of taxes I pay from income?

4.)Is there any benfit over having a SDIRA for real estate over a 401k?

Thanks for all your input and help-Eric Hamilton

@Eric Hamilton

The cost would depend on providers, services they provide and value, I suggest interviewing several before making your decision.

You can not borrow from an IRA personally, but if you wanted to buy real estate in your IRA, the IRA can borrow but the loan must be non-recourse.

The contribution limit for an IRA is $5,500 per year (if you are over 50 there is an additional $1,000 in catch up that you can contribute). The contributions do not come from your paycheck since this is individual plan, not employer sponsored plan.

Yes, 401k has number of advantages over IRA, one of the major ones is exempt from UDFI taxation on leveraged real estate, I discuss benefits in details on this blog:

Hope this helps, good luck!

Thanks everyone for the insights and other blogs to look up on. The big reason I guess I am asking is I want to be able to contribute a large potion of my income from my employer pre-tax and then turn around and put the money toward investment properties to avoid paying higher taxes is this also possible? With the solo-401k it sounds possible but do I already have to have a business or do I just setup a LLC when I buy my first property? Thanks again for the info I had no idea about the solo-401k sounds like a good deal.

@Eric Hamilton

To be eligible for the Solo 401k, you do need to have some type of business or self-employment activity. Your self-employment activity can be on a part time basis and in addition to full time employment. There is no minimum amount of activity or income that needs to be generated, however contributions to these plans are based on earned income, so that is something to consider as well. Your CPA will likely advise that you'll need more than just passive real estate investing to be eligible.

Do you perform any consulting work or get a 1099 for any services provided? Most independent contractor work will allow you to setup a Solo 401k plan.

Thanks Justin,I just recently joined a networking marketing group that does genrate me a 1099 nothing significant at this point it's more or less something on the side to grow my own business.Most of the income would come from my employment since I don't have any real estate other than my own residence at this time. Another thing I am wondering is I am also wanting some cash flow early on of my investments to replace my job income.What kind of penalty do you get for taking money out of solo 401k? 

Hi @Eric Hamilton .

Working as an independent network marketing representative is self employment activity.

Replacing the income from your job can take time and you want to be sure you're ready for the transition. There are a lot of knowledgable folks on BP who can help with transitioning from your employment to full time real estate investor as well as a lot of existing threads that cover the topic.

As far as the Solo 401k is concerned, you want to keep your retirement account investing and your own investing separate. If you invest in real estate outside of your retirement account, you are working on building an income stream that could replace your job. If you invest inside your retirement account (such as the Solo 401k), you are working on building for retirement. They are 2 separate buckets, both of which are great to build, but it's important to understand the difference. Retirement accounts are not meant to create an income stream for you now. They are meant to build asset value for you later (presumably when you are retired and do not have the income stream you had while working).

There are 2 ways to take money out of your Solo 401k. One way is a participant loan, the term on which can be up to 5 years. There is no penalty for this. The other way is an actual distribution. Like other retirement accounts, distributions from the Solo 401k are taxed as ordinary income and there is an additional 10% early distribution penalty if you are not at least age 59.5. That penalty underlines the fact that retirement accounts are not meant for your use immediately, but for later on.

The best approach for building an income stream is to plan to do investing outside of retirement funds (whether in your name personally or in an LLC as you mentioned in a previous post). If you already have -or- want to build retirement funds to also invest in real estate, the Solo 401k is the best vehicle to do so if you're eligible. Many Solo 401k participants enjoy the benefits of investing both outside and inside their Solo 401k plans.

Ok that makes alot of sense Justin so you are saying that ideally you have two separate funds that you invest in with this type of system one that goes toward your retirement and one that goes toward you but immediately.I ask this mostly because Im just looking at reducing my taxes ideally from my job.  Sorry if I sound like a newbie because I seriously am.Haha but that makes alot more sense to me now that you broke it down like that.Thankyou

@Eric Hamilton

Yes, if you are interested in investing in real estate as a business, and also having retirement funds in real estate (as opposed to the stock market) then you would have two separate funds even if they are both investing in the same asset class, as you mentioned. I put that "if" there because not everyone will invest both "buckets" into the same assets:

  • some people will choose to have a real estate investing business and ignore retirement accounts completely
  • still others will have a business in something besides real estate and setup a Solo 401k for that business, and invest their retirement funds into real estate because

So your business activity and your retirement accounts really are two different subjects, but you may very well decide to invest one, the other, or both in real estate.

I think one of the key aspects to the Solo 401k is flexibility. It allows you to invest into almost anything and you can change around your investments as you see fit.

You don't sound like a newbie to me. Glad I could help.