The Best Retirement Plan
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
IRA/401k plans as they relate to self direction/self administered has been a hot topic lately and as such, I would like to attempt to get a consensus on experienced investors' perspectives to the following question:
What is the best qualified plan for us RE investors who have or want to have some type of self directed retirement plan?
Traditional or Roth IRA? SEP IRA? 401k? Solo K plan? or ????
NOTE: Let's not debate which is better - ROTH or Traditional IRA.
-Will Barnard
First, let’s agree that any plan which allows you to invest tax free for a really long time, is a good plan. The rest comes down to personal need and nuance. It goes without saying that there are many ways to invest in real estate and your plan should fit your needs. Here’s the order, from simplest to most complicated (also simple, as you’ll see), in my opinion.
IRA’s let anyone with earned income invest before-tax income for tax free growth. If you pay the tax in advance, you can invest the after-tax income into a Roth IRA and enjoy the same tax free growth as well. The difference is Roth withdrawals are tax free.
Any business that has a payroll can open a 401k (traditional or Roth). It doesn’t have to be a corporation or LLC. Sole proprietorship's pay payroll and they can open a 401k.
Depending on your age, IRA contributions are currently limited to $6000 per year. Your 401k contributions are limited to $49000 on a relatively high percent of your income so 401k benefits are enormous.
You or your company can open an IRA or 401k, respectively, thru a company like Fidelity Investments or Schwab. Here, you have to invest in their products, which are pretty much limited to stocks, bonds, and mutual funds.
You or your company can also open a self-directed IRA or 401k thru companies like Pensco or Entrust and they will let you invest in almost anything except collectables and insurance and a few others. (I’m not trying to over-simplify, there are many rules you have to comply with behind these investments.) In this case your custodian will write the checks on your behalf. One benefit is that they will vet your investment and prevent you from making an overtly obvious prohibited investment, such as buying a home for yourself with your retirement funds. One detriment is that it can take weeks for them to draw the check. If you’re investing in time sensitive investments, such as hard money lending on REO’s, or paying hungry contractors, this won’t necessarily work. It can be perfect for investing in RE partnerships, syndications, and JV’s.
The next level is a self-directed plan (IRA or 401k) with checkbook access. Here Pensco, for example, will invest your retirement money into an LLC that you manage. The same investing rules apply except you write the checks yourself. You have the benefit of timely control and can write checks or wire money immediately. As a lender to flippers who sometimes call with deals that must be funded tomorrow (I’m not kidding) this can be very handy. The drawback is that an LLC can be expensive, especially in California, and it has to file a tax return. Custodians like Pensco make a lot of money with junk fees so choose your custodian carefully.
Next, and the ultimate plan in my opinion, is a self-directed 401k where you are the trustee. In effect, you become Pensco. Many companies (not Entrust or Pensco) will help you set the plan up. Google self-directed 401k and you’ll hit many. What you pay for is a dishearteningly simple 3-ring binder containing “The Plan.†That’s it. Really. You then open a separate checking account and transfer everyone’s retirement money into one account. There is no LLC. It’s you and your company and you must scrupulously keep track of the retirement roll-overs and contributions from each participant. One drawback is your SD-401k has to file a form 5500 tax return and there are annual fees for paperwork your administrator will likely provide to keep your plan current. One benefit is there are no junk fees. You now have checkbook access over an account that will accept both traditional IRA and Roth rollovers from all employees (my wife and I in this case), can contribute up to $49k tax deferred (or tax free in the case of Roth contributions) for each, and you have immediate control of all funds.
Sorry for the long post but I hope this helps a bit.
Jeff
@Dawn Anastasi you can definitely split your 401k into multiple entities including a Solo401k(make sure your company of choice allows loans) and a Self-Directed IRA at whatever percentages you wanted to do and leave some in your original 401k as well if you wanted diversity with an index fund for example.
Hello everyone, I am new to BiggerPockets. I joined specifically for the Solo 401k topic. I have spent the last month reading everything I can find on the subject. While the amount of information is vast there are still so many questions left unanswered. My biggest concern at the moment, tax right offs, for my individual return. I am a sole proprietor and I need the write offs. If I have a solo 401k purchase a property what happens to the write offs? I have a deal that I am closing in three weeks and I am afraid if I close in my name then that will preclude ever getting it into the 401, but on that I am not 100% sure. Great forum by the way really appreciate all the knowledge, kudos to you all!
@Jim Biggs what write offs are you asking about? I have self directed retirement plans and have researched a lot about them, however the below is in no way legal or tax advice so consult with a professional for your specific situation.
Your i401K and you are two separate taxable entities, as such anything bought in the i401K has no bearing on your tax situation. So if you are wondering about the depreciation deductions then no you will not be able to pass those onto your personal return if the i401K holds the property. This is one reason many (here and elsewhere) do not recommend holding RE in a retirement plan, instead they recommend holding RE backed investments like notes and tax liens ect.
Now if you mean you need the retirement plan contribution deduction then yes you would be able to claim that by contributing to your i401K. As far as if you were to close in your name, no you will never be able to place it into your i401K later. Once you or your i401K buy something, anything really, you can never buy or sell to a disqualified person. So if you want to invest in something make sure you are buying it where you want it because you can't just close it in and out of retirement plans.
412i, you can have an indexed annuity linked to market gains without any of the negatives of investing in the market (some indexed annuities are bonusing 5-10%) with a combination of permanent whole life insurance that you can take streams of income from.
Here are some great items about this plan
Something to think about...
Jim,
As a sole proprietor you can defer 17,500 (Plus 5000 if you're 50+) You can also contribute up to 20% of your Schedule C profit to the solo 401k.
If you purchase a property inside of your solo 401k, you do not have to worry about deductions if you did not use any financing for the property.
-Steven
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Raymond
@Jim Biggs if you have already put in a purchase offer on your investment property in a name other than your solo401k entity, your trustee may not allow you to close on the house in the name of the solo 401k. Something to check on with your trustee before considering your options for this particular purchase.
Thanks everyone for your response. @Raymond B.appreciate help for the newbie! Seems like a lot to give up (Tax Deductions) buying inside the 401. Looks like I have a lot more work to do. Ben Franklin the numbers, again really appreciate everyone's input! @Steven Hamilton II @Dave Savage @Justin B.
Investing inside your 401K is not mutually exclusive outside the 401K. Just because you have steak doesn't mean you can't have cake.
I get my documents through completeira.com. Joshua Sharp is incredibly well informed. He's always a phone call away, and can guide you through the prohibited transaction maze. The advantages of a 401K over an IRA, even a checkbook control IRA are too many to list. Dmitriy Fomichenko has listed them here in a very cogent and understandable manner. Check out his posts. He also facilitates 401Ks as do I.
The biggest advantage to 401Ks is the favorable tax treatment of leveraged property. You can borrow to your heart's content without paying a nasty tax called UBIT. IRAs, both traditional and Roth, incur UBIT on leveraged property. Thus your transactions in a 401K are 30 - 50% more profitable where loans are used.
The next big advantage is that you can borrow 50% of your account value, up to $50,000. AND if you use this money for business purposes, you can deduct the interest as well.
Read Dmitriy's posts for a more complete analysis of advantages. You'll be glad you did.
PS You don't need a third party administrator for 401Ks, You need an advisor who can answer questions as they come up.
I don't see any reason why you would want to split your rollover partially into Solo 401k and other portion into an IRA. With Solo 401k you can do everything you can with conventional IRA or self-directed IRA. But Solo 401k has several major advantages over an IRA (been listed many times), so that it becomes pointless to split. You should move everything to Solo(k) and then split portion into real estate, notes, mutual funds or however else you wish.
Save money on the administrative cost while maintaining full control.
I think people sometimes get confused and are comparing apples to oranges when considering buying real estate inside of a retirement account. So Jim while it is correct that you don't get to write off depreciation on the property owned by your retirement account (in most cases), remember that you are doing this inside of a tax-deferred account. You don't have any income to report when you do this inside of an IRA or 401k.
Now, if you want tax write off and have personal savings to invest, then yes, go and buy investment property and get maximum tax benefits. But this has nothing to do with your 401k, you still have money there and you need to be wise steward and put those funds to work. So the question is: how do I invest my 401k funds (the question is not: Should I take early distribution from my 401k, pay taxes and penalties, which could be nearly 50%, and then buy property in my own name and claim tax benefits)? You can either leave it in the hands or a stock broker or some fund manager and have no control over the performance of that stock or mutual fund, or use self directed IRA or Solo 401k and invest your money into something that you have much better control over, have better understanding and can get better return on investment (this could be investment property, tax-lien certificates, mortgage notes, etc.).
Both Partnerships and S-Corps can have a Solo 401k as long as there are no common-law employees. Eg. You and your Spouse could be a partnership or even an S-Corp. You, your Spouse and your children can also be a Partnership or S-Corp if you want to include your children in the plan.
The Partnership partners or Members of the S-Corp need not be your family members as well... just can not have common law employees.
I think a 401k employer sponsored plan is a good way to go. If you work for a pretty good company they will provide a match and a yearly profit sharing. These two things will help you save at a much faster rate.
I've just got my solo-401k setup and funding coming in from a roll over xfer from my ex employer's 401k plan. They will file a 1099-R but is there a form my solo 401k files for the incoming funds?
The form 5498 seems to be for IRAs. Is there a form solo-401ks file for incoming funds?
Who setup your plan? They should be able to assist you with this question.
you are correct, form 5498 only applicable for an IRA and can not be used with 401k. You should request a Direct Rollover instead of distribution.
Who established your plan, did you ask your provider for assistance with this basic question, it should be part of the service you are getting.
Advanta -IRA (and solo 401k) It is a direct roll over. Advanta said no IRS forms for funding the solo 401k. Just checking with other experts. I took the self administration option to get the trustee/administrator OUT of being the middleman in transactions. IE check book and I do book keeping and filings (5500) etc. A few $100 a year. I forget the annual fee. Which is not my concern. I'm coming from Equity trust and moving 12 rentals out of Equity into my wife's solo 401k. And my works 401k cash into my solo account.
What we are adamant about getting out of is the SD-IRA audit risk and out of the most miserable SD-IRA custodian there can be Equity trust. ET is probably ok for holding notes, few transactions. But a rental and worse 12 of them is just NOT workable. So many delays and lost rent checks...
Aside for taking on IRS filings (5500's) and book keeping I see only pluses for going to a solo-401k hung off our S-corp property managment co.
you must request "Direct Rollover", assuming that they will process it as such you will get a 1099-R but with proper coding. In this case code G will be listed in the box 7, which means "Direct Rollover". Contact Advanta for assistance on how to properly submit your request.
@Curt Smith
Besides being re-portable by the current IRA custodian on Form 1099-R as non-taxable direct rollover, you can report the direct rollover on Form 5500-ez, Part III, 8c as well when you file it in July of 2017. Note that even though a Form 5500-ez is not required unless total plan assets exceed $250K, many plan trustees file one to start the statute of limitations afforded to 401k plans once the first return is filed.