We own multiple commercial properties in our downtown (Series LLC in TX) and have several under contract. We are looking to roll over our traditional IRAs to make the purchase w/ a non-recourse loan. I have read every post I can find on BP (and watched a lot of YouTube videos) about SDIRA vs Solo401k and I am still not sure which way to go. I have read that S401k is not subject to UBIT and other taxes. Also, S401k has no IRS reporting until the total is $250K+?? Is this correct? Is S401k the best route? Who do you recommend to help with the SDIRA / S401k setup? Approximately what is the timeline to get the funds moved?
Also, can our series LLC purchase the properties from the SDIRA / S401k at a later date? Can we have them appraised by an independent appraiser to establish a value? Or does this violate the prohibited transactions rule??? Anything else we need to think about??? Thank you in advance for help/experience/wisdom.
PS: Thanks BP and all members for the wealth of knowledge found on this site, the podcasts, and books. I find myself browsing topics I am dealing with and other topics that I may approach in the future, constantly listening to podcasts and reading.
A Solo 401(k) can have some advantages over an IRA, but both are great ways to diversify tax-sheltered retirement savings and invest in things like real estate.
There is no blanket "better" plan. It is all situational for each investor. To qualify for a Solo 401(k), you must be self-employed producing earned income (not rents or other passive earnings) and have no full time employees in any business you control.
A self-directed IRA or 401(k) may not transact with you or a business you control, nor may it comingle funds or provide benefit to you. These vehicles are purely about diversifying that tax-sheltered retirement savings.
There are several professionals here on BP who specialize in this niche. Get on the phone and you will quickly learn the best approach for you and who is a good provider of these services. Education is the main part of this service.
Solo 401k is exempt from taxes on Unrelated Debt Financed Income only. It is not exempt from UBIT in general. If there is an income in the plan from an active trade or business it will be subject to taxation.
Yes, reporting is generally not required until plan assets reach $250,000. If you are eligible, and can maintain your eligibility - Solo 401k would be more advantageous over an IRA, but like Brian said you should talk to an expert to help you determine the best route for YOUR situation. The plan typically can be set up in just a few days, then you can proceed with the funding of the plan via rollover, which can be done in a week or two.
No self-dealing is allowed with qualified plans, that would be considered prohibited transaction by the IRS:
You may have seen this already, but if you didn't here is a good thread where you can learn a lot:
As @Dmitriy Fomichenko and @Brian Eastman stated, each of the plans has its own pros and cons. You need to compare them both and take into account your own strategy with these funds to decide which of the plans will work best in your case and what you're qualified for.
I found the infographic on this site helpful: https://www.sensefinancial.com/invest-in-real-estate-with-retirement-funds/
Keep in mind that setting up account and moving funds is a relatively lengthy process. Give yourself at least a month (in some cases more) to set up the account and transfer funds.
@Sean Vanderveer , if you can establish a Solo401K (as it requires you to have self employment income...which you can generate by doing property management for your properties), that is a much better alternative than SDIRA, with multiple advantages. You get everything that SDIRA has, with more advantages and less constrictions.
The only negative I know of a S401K is that you can't roll over a ROTH into its respective S401K ROTH correspondent. You can establish a Roth S401K and make contributions (bigger than with a SDIRA), but you can't bring your Roth 401K or Roth IRA into it.
I suggest you take a serious look at S401K before discarding the idea.
Slight correction: only Roth IRA cannot be rolled into Solo 401K. Roth 401K or Roth 457 CAN be rolled into Roth Solo 401K.