I am not self-employed but want a Self-Directed 401(k) - ??
Rental Property Investor · Austin, TX · Member since 2015 · 280 posts · 176 votes
I am interested in transferring my 401(k) from my previous company into a Self-Directed 401(k) - NOT a Self-Directed IRA - for the purpose of investing in cash flowing rental properties. However, I don not have a business. Do I simply need to start a random business and, if so, is there a minimum I need to earn each year to keep my sole proprietor status?
Also, I know that - with a Self-Directed IRA - there are a lot of disqualification scenarios. With a Self-Directed 401(k), are those still there? For example, can my business simply be a property management company and I manage the properties in the
Self-Directed 401(k) for a small fee or is this not allowed?
Finally, I have had a sole proprietorship before and the taxes for one are relatively easy to incorporate into personal tax returns. However, I am not sure how owning rental property inside a Self-Directed 401(k) will affect it. Anyone have 1st hand experience? Also, how does the depreciation tax benefit roll into taxes - or does it not?
*If you have a Self-Directed 401(k) and are happy with the entity that helped you set it up, please PM me! I am also in Austin so if you happen to know anyone local, I would appreciate their contact information too. Thanks!
I am familiar with the argument you are referring to. Frankly, it misses the point.
Comparing investing in real estate with retirement funds to investing in real estate with non-qualified funds is apples and oranges. The tax treatment is entirely different, just as it is different investing in stocks with taxable and non-taxable funds.
The real question to ask as an investor is this: "If I understand real estate as an asset class, can I generate better results for my tax-sheltered retirement savings than if I left it in the stock market?"
To take a 40-60% cut in value of your investment capital by taking an early distribution of an IRA or 401(k) is a fool's bargain. Keep the full amount available to invest, invest in solid assets that you know and understand, and you will create a large sum of wealth to draw on in your golden years. It is not rocket science.
A detailed education on financial strategy is not something that comes from an internet forum. You will want to build a team of professionals around you such as a tax strategist, fee only financial advisor, etc.
While there is certainly some merit to the guru programs such as Kiyosaki et al, they all have a specific marketing agenda and focus on finding ways to push emotional buttons. One thing the industry as a whole wants to do is free up capital to invest in deals they promote, and tapping into retirement savings via early distributions or a self-directed plan is often promoted.
What I stated above is really the essentials: don't cut your retirement savings in half by taking an early distribution, and evaluate the investments made within the plan on their own merits - not how they may compare to different investment avenues. The tax-sheltering benefits of a retirement plan, whether tax-deferred or Roth, are a means to take a certain amount of capital and mushroom the growth over time by compounding the tax-savings inherent in the vehicle. That is true whether the funds are invested in conventional assets or real estate or venture capital or private lending. So, pick the choice of assets where you think you can have the most success growing your retirement plan. For some folks, that may be real estate.
It does not matter what investment strategy you use. Whatever you can do with cash - you can do the SAME exact strategy inside your retirement account.
My point is: whatever investment you pursue, doing it inside a retirement account BEATS doing it with cash taken out of retirement account, due to difference in taxation and power of compounding.
The more aggressive your investment is - the bigger is the advantage of doing it INSIDE retirement accounts.
Thanks Brian! I agree with your prudent way of thinking. I also agree with not cutting retirement funds in half (I would never do that too!). I feel people need to be more strategic around that. Depending on the tax bracket or short term situation the actual tax effect from cashing out of a retirement account can be manipulated down to an effective 10-25% tax hit based on what happened in the current year or immediate plans for the next year. Basically like most complicated matters...it really depends on all the variables and moving pieces. No one sized fits all approach is applicable to this matter. Working with a team of trusted advisers is excellent advice. The hard part is finding them!
Thank you again for providing such great insight and education on this thread! Couldn't agree more with using professionals when in doubt.
@Dmitriy Fomichenko It's not misleading, it is my opinion, which is always 100% correct. Putting money into a "tax shelter" is giving the IRS a say in how you can use your own money. The trade off of paying taxes now or paying taxes later, in my opinion, is not worth the hassle of following all of the IRS rules and restrictions. If you have to use loopholes created by someone else, you are not in control. In my opinion.
Anthony, of course there are rules that you need to understand and follow when investing using tax deferred retirement accounts (you can use those rules to your advantage), but you still have to follow rules of law when you invest outside of "tax shelter". The bottom line is that you have to follow applicable rules no matter how you invest or which vehicle you use, successful investors embrace the rules for their benefits.
Your statement above is too generic. I agree with you that investment options are limited with conventional retirement accounts and you and I have no control over the stock market performance, however when you use self-directed IRA or 401k YOU (not the IRS) have complete control how your money is invested and should invest into something that you understand and can control.
The results are not a matter of opinion, but simple math. Just run the numbers and you'll see that it would be financially advantageous to invest inside of tax shelter vs personally where your investment returns are depleted every year by taxation. If you are willing to pay the taxes now - just convert your retirement funds to Roth and invest tax-free for the rest of your life (can't do that if you own investment personally).
I understand that you may be willing to pay more in taxes for the sake of convenience or little more freedom. That is your subjective opinion and your right. I get it! But your strategy may not be the best strategy for someone else who is looking it it objectively.