What are you investing in with your Solo 401K?

Tax, SDIRAs & Cost Segregation
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What are you investing in with your Solo 401K?

Jeffrey Radcliffe
Real Estate Broker · Ravenel, SC · Member since 2014 · 24 posts · 14 votes

Hello, BP Community,

If you have a Solo 401K w/ $100K to invest, how would you invest it, or what are you currently investing in with your Solo 401K? 

I am considering investing in a small rental property and paying cash or some other type of cash flowing passive investment.  I am curious to know what other's with a Solo 401K are investing in without violating the Prohibited Transactions rule. 

Thank you for sharing your investments and advice in advance.

Jeff Radcliffe 

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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y

Jeff, I own couple rentals in my retirement account but majority of my funds invested in notes. I do both short term private lending as well as several long term notes. The reason I like private lending as investment for my retirement funds is because it is totally passive, good returns (I average 10% annually) the risk is lower, the returns are predictable, virtually no expenses with this type of investment and you don't have to be concerned about self-dealing compared to owning a rental. 

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    Jeff, I own couple rentals in my retirement account but majority of my funds invested in notes. I do both short term private lending as well as several long term notes. The reason I like private lending as investment for my retirement funds is because it is totally passive, good returns (I average 10% annually) the risk is lower, the returns are predictable, virtually no expenses with this type of investment and you don't have to be concerned about self-dealing compared to owning a rental. 

    6Reply
  • Rodney Miller
    Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
    9y

    I agree with Dmitry. I too own rentals and owner financed properties in my IRA. I'm not as worried as much about self dealing but I am worried about the liability. If something happens and the renter decides to sue, they are suing the owner of the property (The IRA). I had an IRA owned house burn down a few years ago and thank god no one was injured. Could have been a nightmare and wiped out my IRA. Buying notes and lending money is my preferred use of IRA funds. Notes are harder and harder to find these days but there are plenty of investors you can lend to. Easy and very passive.

    1Reply
  • Jeffrey Radcliffe
    OP
    Real Estate Broker · Ravenel, SC · Member since 2014 · 24 posts · 14 votes
    9y

    @Dmitriy Fomichenko @Rodney Miller

    Thank you, both for your advice and explanations. I have considered the private lending route, but honestly, I am completely inexperienced with notes. Can either of you recommend a good source or book that fully explains the type of investing you are referring too? BTW, thank you for taking the time to reply. I really appreciate it.

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    I don't like putting rentals into retirement funds. You lose all depreciation write offs, maintenance write offs, property tax write offs, etc. If you hold these outside of your retirement account you get the tax benefits yearly not even taking depreciation into account. I do HML with my SOLO 401K because there are no tax benefits lost. Some IRA and 401K custodians don't tell you what you LOSE putting RE into your retirement account. Their concern is getting more accounts and assets to charge YOU to manage.

    I do HML and my minimum annual return is 16.5%.

    4Reply
  • Roger StPierreBusiness Member
    Lender · Rapid City, SD · Member since 2017 · 30 posts · 20 votes
    9y

    We finance rentals for investors using their self directed IRA's and 401(k)s. And yes, you can take all the normal deductions of real estate when you file your 990-T Tax Returns. Lock in those losses annually and then when you go to sell, you have offsets for any potential capital gains and UBIT taxes. Financing or refinancing and taking cash-out of a free and clear rental is a great way to increase your rate of return.

    [email protected]605-341-1203
    First Western Federal Savings Bank
    WebsiteView Page
    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y
    Originally posted by @Roger StPierre:

    We finance rentals for investors using their self directed IRA's and 401(k)s. And yes, you can take all the normal deductions of real estate when you file your 990-T Tax Returns. Lock in those losses annually and then when you go to sell, you have offsets for any potential capital gains and UBIT taxes. Financing or refinancing and taking cash-out of a free and clear rental is a great way to increase your rate of return.

     I stand corrected! Nothing worse than posting bad info...

    UBIT still comes into play?

    2Reply
  • Roger StPierreBusiness Member
    Lender · Rapid City, SD · Member since 2017 · 30 posts · 20 votes
    9y

    John, UBIT only comes into play on self directed IRA's, Not on Solo K's (Solo 401(k)s). Sorry to confuse the 2 kinds of accounts. I guess I shouldn't have mixed the 2 types in this one blog post on 401(k)s.

    [email protected]605-341-1203
    First Western Federal Savings Bank
    WebsiteView Page
    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    @John Thedford , excluding depreciation, what is the financial difference between holding rental properties personally, or in a retirement account? Personally: I collect rent I pay mortgage interest I pay property taxes I pay for property management I pay for repairs I pay for capex The sum of those figures is a net income which equals cash in my pocket (or principal paydown), and is taxable at current rates excluding depreciation. In a retirement account: It collects rent It pays mortgage interest It pays property taxes It pays for property management It pays for repairs It pays for capex The sum of those figures (which would be the same as the figures above) produce a net income equal to the scenario above. The net is an increase in the value of the retirement account, which is not accessible until retirement, but is not taxed until then, either (unless it's a Roth account). So what's the difference, except for timing of taxation and access? And yes, I left off depreciation, because no one ever brings up the 25% depreciation recapture tax due on sale of the property (or the end of a 1031 exchange chain). This can be quite a hefty tax burden.
    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    @Dan Schwartz

    I will take my depreciation every year. Furthermore, I get tax benefits every year. If put in a retirement account, you don't get cash flow. If you hold RE inside of the account, is it possible to take a partial deduction or must you take the entire value (of the property) as a single distribution? As to depreciation, I won't recapture because I plan to pass property on to my beneficiaries. Besides these questions, 16.5% is TOUGH to beat for steady and STRONG returns. I am eligible to take distributions out now, and if I only want to take 20K out or 100K out in various increments I can do so. RE cannot offer this does it?

    1Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    @John Thedford congratulations on your HML returns. I also find your latest rationale for avoiding rental real estate in retirement accounts to be far less specious than your previous one.
    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y
    Originally posted by @Dan Schwartz:

    @John Thedford congratulations on your HML returns. I also find your latest rationale for avoiding rental real estate in retirement accounts to be far less specious than your previous one.

    The bottom line is: even though you can get the write offs INSIDE a retirement account I still find it not as valuable as holding RE outside. I want CASH every year. I want tax benefits every year. You stated UBIT MAY come into play in your scenario. What is the difference in buying stocks and they fall in value inside of a retirement account? Same result?? I want my RE investments to pay me now. People may pass on waiting to get old enough to take distributions.Though you may get some tax benefits NOW inside of an IRA they don't benefit you UNTIL you take the RE out of the plan.

    2Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y
    Originally posted by @John Thedford:

    I don't like putting rentals into retirement funds. You lose all depreciation write offs, maintenance write offs, property tax write offs, etc. If you hold these outside of your retirement account you get the tax benefits yearly not even taking depreciation into account. I do HML with my SOLO 401K because there are no tax benefits lost. Some IRA and 401K custodians don't tell you what you LOSE putting RE into your retirement account. Their concern is getting more accounts and assets to charge YOU to manage.

    I do HML and my minimum annual return is 16.5%.

    I'm sorry John, but you keep posting incorrect information. While I agree with you on the investment strategy for retirement accounts (we both are prefer private lending), your statement that one is losing tax write offs when buying rental property in a retirement account is incorrect. You are comparing apples and oranges (buying rental personally vs inside of an IRA/401k). And that is not the case here. Original poster has $100K in his 401k and looking for ideas on how to invest that inside of his 401k. He is NOT considering taking early distribution, losing half of his balance to taxes and penalties, and then buying a rental under his own name so he can get some tax deductions. 

    I would be happy to jump on a phone call with you to provide further explanation if needed, just let me know.

    P.S. No doubt that your strategy is working well and congratulations again on your success! 

    2Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    @Dmitriy Fomichenko

    Yes the other poster corrected me. See my posts above. Although there is some merit holding inside of a retirement account, there are good reasons to consider the other alternative. 

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    @Dan Schwartz

    You still didn't answer my questions which I am curious to know the answer please.

    0Reply
  • William W. Humphrey
    Accountant · Louisville, CO · Member since 2017 · 80 posts · 34 votes
    9y

    @Jeffrey Radcliffe  It is important, when discussing strategy, to remember this is not an either/ or strategy.  If you have retirement funds available to invest, and you are more comfortable or knowledgeable in the real estate arena versus a stock portfolio, then you should capitalize on your knowledge base and invest your retirement funds in what you know.  

    I would advocate doing as much research as possible in regards to how you choose to invest your retirement funds as well as your personal funds.  Find the right advisers and administrators for your needs.

    Best of luck to you!

    2Reply
  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 834 posts · 798 votes
    9y
    Originally posted by @Dmitriy Fomichenko:
    Originally posted by @John Thedford:

    I don't like putting rentals into retirement funds. You lose all depreciation write offs, maintenance write offs, property tax write offs, etc. If you hold these outside of your retirement account you get the tax benefits yearly not even taking depreciation into account. I do HML with my SOLO 401K because there are no tax benefits lost. Some IRA and 401K custodians don't tell you what you LOSE putting RE into your retirement account. Their concern is getting more accounts and assets to charge YOU to manage.

    I do HML and my minimum annual return is 16.5%.

    I'm sorry John, but you keep posting incorrect information. While I agree with you on the investment strategy for retirement accounts (we both are prefer private lending), your statement that one is losing tax write offs when buying rental property in a retirement account is incorrect. You are comparing apples and oranges (buying rental personally vs inside of an IRA/401k). And that is not the case here. Original poster has $100K in his 401k and looking for ideas on how to invest that inside of his 401k. He is NOT considering taking early distribution, losing half of his balance to taxes and penalties, and then buying a rental under his own name so he can get some tax deductions. 

    I would be happy to jump on a phone call with you to provide further explanation if needed, just let me know.

    P.S. No doubt that your strategy is working well and congratulations again on your success! 

     @Dmitriy Fomichenko - That is not the way I am interpreting John Thedford's comments at all. He is not stating anything incorrect. You cannot take depreciation expense on property held in an IRA or 401(k). I believe that his point is that without the depreciation expense, there is no point in investing directly in real estate in a qualified account. You'll get better returns with HML or private lending.

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    @Dmitriy Fomichenko

    The write offs mentioned above happen INSIDE the account therefor not benefiting the account holder on a year basis. Correct?
    When the RE is taken as a distribution, I assume it must be the complete asset and not part of it? Correct? So one may be forced to take a 125K distribution vs taking a cash distribution of 50K over three years. Correct?  And what about UBIT? The other poster failed to respond to my questions. I am asking to learn! 

    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    @Thomas Rutkowski, my point was that when you invest in rental property with your retirement account you don't lose tax write offs. The keyword "lose" is incorrect. It doesn't' matter what you invest in with your retirement account - the investment does not affect your personal taxes. You don't lose anything! The gains, incomes or profits made are not yours and are not taxes inside of an IRA normally. Unless there is income subject to UBIT (unrelated business income tax). And if that is the case then such income can be offset with depreciation and other deductions. 

    When buying real estate in an IRA using leverage (has to be non-recourse loan), the income portion derived from the leveraged portion of the property is subject to UBIT. The IRA is responsible for paying those taxes, not the account owner personally. And again, in this case deduction can be applied.

    Please note that a Solo 401k is exempt from UBIT tax on leveraged real estate. 

    @John Thedford, real estate can be taken out your retirement account as in-kind distribution. It is possible to take partial distribution but of course taking the entire asset at once would be easier but the tax burden has to be absorbed on a single year. 

    Hope this helps! 

    0Reply
  • William W. Humphrey
    Accountant · Louisville, CO · Member since 2017 · 80 posts · 34 votes
    9y

    @Thomas Rutkowski It is also important to know, when considering leveraging your IRA to purchase real estate and UBIT, your IRA can do a 1031 exchange to put off the UBIT if the property is still leveraged at the time of the sale.

    UBIT is calculated on a 12 month rolling average, which means it only looks back 12 months.  If you use a 1031 exchange to purchase another leveraged property, and have the leverage paid off for 12 months prior to selling the property, you never pay the UBIT on the sale.    

    1Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    @John Thedford "The bottom line is: even though you can get the write offs INSIDE a retirement account I still find it not as valuable as holding RE outside." That is a valid opinion. "I want CASH every year. I want tax benefits every year." Also a valid opinion. Pointing out for the record that you don't get your HML-in-retirement-account cash every year (actually, I don't know your age...maybe you do), but I continue to maintain that the only tax benefit you are receiving is the depreciation deduction. Since your life plan is to hold-and-bequeath, this is a great current-and-future benefit. Anyone who is not taking that strategy is simply deferring the tax on depreciation. "You stated UBIT MAY come into play in your scenario. What is the difference in buying stocks and they fall in value inside of a retirement account? Same result??" I've said nothing about UBIT. Others have. Not sure what the second part of this relates to. Capital losses are possible in any investment: stocks, bonds, notes, loans, real estate. "I want my RE investments to pay me now. People may pass on waiting to get old enough to take distributions." I think everyone investing in retirement accounts understands that they get paid later. That's kind of the point of it. "Though you may get some tax benefits NOW inside of an IRA they don't benefit you UNTIL you take the RE out of the plan." Save for your plan to 1031 and bequeath all properties I still don't see a difference between a net x% return in real estate and the same net x% return in HML. Also, you don't have to take the real estate or of the plan. You could liquidate it without triggering capital gains or depreciation recapture taxes, and distribute or reinvest the proceeds at whatever rate you choose.
    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    For the record, I have no desire whatsoever to hold real estate in my retirement accounts. I actually agree that notes and HML (and any other investment that is taxed at ordinary rates) are superior investments in retirement accounts, so long as the rate of return is equal or better. But I found the argument originally made against holding real estate to be inaccurate - as others have as well - which is why I chimed in. It also wasn't the first time I had seen that argument made. Good discussion.
    1Reply
  • Rodney Miller
    Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
    9y
    Originally posted by @Jeffrey Radcliffe:

    @Dmitriy Fomichenko @Rodney Miller

    Thank you, both for your advice and explanations. I have considered the private lending route, but honestly, I am completely inexperienced with notes. Can either of you recommend a good source or book that fully explains the type of investing you are referring too? BTW, thank you for taking the time to reply. I really appreciate it.

    0Reply
  • Rodney Miller
    Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
    9y
    Originally posted by @Jeffrey Radcliffe:

    @Dmitriy Fomichenko @Rodney Miller

    Thank you, both for your advice and explanations. I have considered the private lending route, but honestly, I am completely inexperienced with notes. Can either of you recommend a good source or book that fully explains the type of investing you are referring too? BTW, thank you for taking the time to reply. I really appreciate it.

     Eddie speed has a corse on buying notes. For private lending just look for books on becoming a private lender or hard money lender. Feel free to call me if you have any more questions.

    0Reply
  • Account Closed
    Investor · Shibuya Ku, Tōkyō-to · Member since 2015 · 90 posts · 36 votes
    9y

    Stocks, few bonds. My cash is in RE happy having some equity/bond market exposure I can just invest and not think about for 30 years.

    0Reply
  • Paul B.
    Rental Property Investor · Dallas, TX · Member since 2015 · 503 posts · 504 votes
    9y

    If I had one, I would be investing in multi-family syndications. I'm doing it with cash now, but I don't need all the returns and would love to do some of it in a tax-advantaged account. A solo 401(k) would be great for what I am doing, because there is less tax liability than a SD IRA. But I am not self-employed, so it would be a difficult to set one up. And my current 401(k) does not allow in-service distributions, so I cannot get at that money unless I quit my job, which I don't intend to do.

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