Tax, Legal Issues, Contracts, Self-Directed IRA

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Cass Lowrie
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Solo 401K vs SDIRA? Which is a better tool for flipping?

Cass Lowrie
  • Investor
  • Myrtle Beach, SC
Posted Aug 20 2019, 14:07

I fix & flip homes. In 2019 that business will profit about $250K. I have an LLC for buying properties and another LLC that holds a contractor's license. (Company A buys the property and Company B renovates it.)

My wife has a 401K from a former job.  It only has $25K in it but I want to get that off the sidelines and invested into our fix & flip business to try and shelter some income taxes.  

I first thought a SDIRA was the correct choice, but the more I read about them, the more restrictive they seem.  (Seems like I would break tax law without ever meaning to!)

Now I'm reading about Solo 401K's and they are starting to sound like a much better tool.

Asking for any advice from the seasoned PRO's here in BiggerPockets.  There is a tremendous amount of experience and wisdom here and I'm hoping to learn from that.  Seeking advice and very thankful for any that comes my way.

What's your opinion/experience with the investment vehicles?  Which is better for fix & flips?

Thank you in advance!!

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Taylor L.#2 Commercial Real Estate Investing Contributor
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Taylor L.#2 Commercial Real Estate Investing Contributor
  • Multifamily and Self Storage Investor
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Replied Aug 20 2019, 14:35

I'm not an advisor, but you and your company would be disqualified from transacting with your wife's SDIRA or Solo 401(k). Both are prohibited from transacting with disqualified persons. If you do go the SDIRA route to invest in other flips, look into Checkbook Control IRAs, because the SDIRA transaction fees & speed will impact your numbers. I do use a SDIRA myself and will be transitioning to checkbook control. 

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Jacob Sampson
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Jacob Sampson
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Replied Aug 20 2019, 14:39
Originally posted by @Taylor L.:

I'm not an advisor, but you and your company would be disqualified from transacting with your wife's SDIRA or Solo 401(k). Both are prohibited from transacting with disqualified persons. If you do go the SDIRA route to invest in other flips, look into Checkbook Control IRAs, because the SDIRA transaction fees & speed will impact your numbers. I do use a SDIRA myself and will be transitioning to checkbook control. 

I have to agree. Neither of these are good tools for flipping. You can't do any of the work, your family can't do any of the work, you can't manage the work. I'm not an advisor but I would do a lot of research first, never mind the insane cost you have to pay to have one of those managed for you. Just grab your LLC like everyone else and go to work.

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Brian Eastman
  • Self Directed IRA & 401k Advisor
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Brian Eastman
  • Self Directed IRA & 401k Advisor
  • Boulder, CO
Replied Aug 20 2019, 14:41

@Cass Lowrie

An IRA and a 401k are going to be identical as far as participating in flip investments. Both are required to adhere to the same rules against self-dealing. If participating in equity profits of a flip, both will be subject to tax on Unrelated Business Taxable Income.

You cannot bring your wife's $25k of retirement money into your flipping activities in any way, so I am not sure how viable a strategy this might be for you. Any IRA/401k investment must be exclusively for the benefit of the IRA and may not intersect with you, lineal family or family owned businesses in any way.

On the other hand, if your two flipping related LLC entities are just you and/or your wife and there are no full time employees under your control working more than 1,000 hours per year, then a Solo 401(k) could be valuable as a means to take some of that $250K in income you are creating and set that aside tax-deferred. You could put as much as $56K into the plan and take a tax break for doing so. In this case, the 401(k) does have an advantage over the IRA. The plan would still need to invest at arm's length, but that savings benefit could be very nice indeed.

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Cass Lowrie
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Cass Lowrie
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Replied Aug 20 2019, 15:05

@Brian Eastman, Hey Brian, thanks for your feedback and advice.  I was starting to think there was not a way to use the $25K for flipping unless we hired another contractor to do all the work.  Seems like no-go to use for fix & flip.

However, the Solo 401K would be a great vehicle for us to each put $56K per year into.  That would effectively shelter $112K of our profits from flipping.  Then we could use the 401Ks to buy/hold rentals for long term growth.  Is that correct?  

Thanks once again for your advice Brian!

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Cass Lowrie
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Cass Lowrie
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Replied Aug 20 2019, 15:07

@Jacob Sampson & @Taylor L. - Guys....thank you for your feedback.  I was starting to come to grips with the fact that $25K would not work for flipping and you kind of confirmed that.  :)

Thanks once again.  I love the BP community!

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Brian Eastman
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Brian Eastman
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Replied Aug 20 2019, 15:07

@Cass Lowrie  Yes, the Solo 401(k) would achieve what you describe.  Hard money lending to other flippers is also a good option for putting that tax-sheltered savings to work investing in an asset class you understand.

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George Blower
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George Blower
  • Retirement Accounts Attorney
  • Southfield, MI
Replied Aug 20 2019, 20:07


@Cass Lowrie

If you are self-employed with no full-time w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.

Solo 401k vs. Self-directed IRA

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

  • Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
  • Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

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Cass Lowrie
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Cass Lowrie
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Replied Aug 21 2019, 04:45

@George Blower, Thanks for the detailed description George.  I sincerely appreciate it!

Sounds like a Solo 401K is the way to go.  If nothing else, we can at least contribute the maximum $56K each per year and shelter $112K right off the bat.

Thanks once again!

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David Krulac
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David Krulac
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Replied Aug 21 2019, 06:07

And @Cass Lowrie  Part of your Solo 401K can also be Roth, so no income tax or capital gains tax forever.  And you as the Manager of the ERISA Plan (Solo 401K) control the checkbook too.

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Cass Lowrie
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Cass Lowrie
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Replied Aug 21 2019, 06:54

@David Krulac - Thank you David!  :)

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Dmitriy Fomichenko#1 Real Estate Deal Analysis & Advice Contributor
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Dmitriy Fomichenko#1 Real Estate Deal Analysis & Advice Contributor
  • Solo 401k Expert
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Replied Aug 21 2019, 08:55

@Cass Lowrie,

As you already know, your wife's or your retirement account would not be allowed to enter into any transaction with your business. Income from flipping (or any other active business) would not be sheltered from taxes, retirement accounts are designed to be invested passively. 

That being said truly self-directed Solo 401k plan can still provide you with tremendous benefits! Sheltering income from your businesses being one of them.

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Thomas Rutkowski
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Thomas Rutkowski
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Replied Aug 21 2019, 10:44

@Cass Lowrie

Neither. If you want to maximize the amount of tax deductible contributions, use a self-directed defined benefit plan. The contribution limits on defined contribution plans are limited by the government.

A defined benefit plan, on the other hand, represents a commitment by the employer to pay some amount of the employees salary in retirement. Thus, you are required to fund it at the level necessary to meet those obligations. This means generally means that you can contribute FAR more than you can with a defined contribution plan.

As the plan Trustee, the business owner has a fiduciary obligation to the plan participants (you and your wife, right?). You also have control over the assets of the plan. 

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Todd Goedeke
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Todd Goedeke
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Replied Aug 21 2019, 18:41

What is wrong with rolling over wife s Retirement plan to Solo 401k of Flipping company in her name?

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Todd Goedeke
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Todd Goedeke
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Replied Aug 21 2019, 18:51

@Cass Lowrie You can still invest a Solo 401k in real estate with leverage. Consider using a Master lease which is triple net to achieve passive cash on cash returns of 15-17%. 

Also, if you own a property in your Solo 401k you want to flip as long as all you do is hire contractors to do work, list it for rent upon completion and then sell you could legally do flip in Solo 401k. 

Any attorneys or 401k advisors please comment.