Recommendations for Custodian of Self-Directed Solo 401k
Marietta, GA · Member since 2016 · 43 posts · 14 votes
I am looking to open a self-directed solo 401k. What are the best custodians out there for self-directed solo 401ks?
In case it makes a difference, I plan to use it to buy rental properties, probably with mortgages since my understanding is that solo 401ks do not pay UBTI.
Thanks!
You're right, the Solo 401k is generally exempt from UDFI tax on leveraged real estate. In addition to looking at custodians for the Solo 401k, there are plan providers who can setup Solo 401k plans that offer checkbook control without the need for a custodian. This will allow you transact more quickly, often at a lower cost. You might want to consider both custodial plans as well as those that offer you checkbook control.
You're right, the Solo 401k is generally exempt from UDFI tax on leveraged real estate. In addition to looking at custodians for the Solo 401k, there are plan providers who can setup Solo 401k plans that offer checkbook control without the need for a custodian. This will allow you transact more quickly, often at a lower cost. You might want to consider both custodial plans as well as those that offer you checkbook control.
Please see the following regarding Considerations re Investing in Real Estate & Considerations re Choosing a Solo 401k provider:
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 that 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 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 use 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).
Considerations in Setting up a Solo 401k to invest in real estate:
1. First, you must be eligible to set up a Solo 401k. In order to be eligible, you must be self-employed (e.g. providing goods and/or services through your personal effort), reporting self-employment activity on your taxes (e.g. Schedule C if you a sole proprietor) & you do not have any w-2 employees working for your self-employed business or otherwise.
2. If you are self-employed with no 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. All of the income and expenses will need to flow in and out of the retirement account.
4. 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...
5. You can't live on the property or otherwise use it for personal use.
6. 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. 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. 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).
Considerations in Choosing a Solo 401k Provider:
1. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).
2. You may wish to confirm that the new 401k provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).
3. You may wish to confirm that the new 401k provider will handle the ongoing compliance support such as any required 5500 filing (e.g. 5500-EZ for a one-participant plan with assets in excess of $250,000), any required tax reporting (e.g. 1099-r in the event of a distribution or in-plan Roth conversion), mandatory plan updates and amendments, etc.
4. If you might take a 401k loan, you may wish to confirm that the new 401k provider will prepare the required 401k participant loan documents.
Here are some issues to consider in choosing a Self-directed IRA provider:
1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be a member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.
2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.
3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).
4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).
5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.
In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.
Hi Mark! I would agree with both George and Justin's points. The most important thing to consider when opening a self directed IRA or solo 401k is to work with a custodian that is knowledgeable of your needs and the plan that they are administrating for you. Working with a custodian who is knowledgeable about the ins and outs of these plans can save you a lot of headache down the road, and you want to make sure that you know enough about the plan yourself to keep it in compliance with IRS guidelines from year to year. As the others mentioned, it is important to make sure that you do in fact qualify for the solo 401k, meaning you are self-employed with no w2 employees. Solo 401ks have a ton of benefits, including the exemption on UDFI, good luck!
-Haley Gant, CISP
Certified IRA Services Professional
Quest Trust Company
"I am looking to open a self-directed solo 401k. What are the best custodians out there for self-directed solo 401ks? "
I'd start with 1031 QIs and ask them. Some of them do these, but am sure, if they don't, they know who would.
They can also tell you the tax consequences since unless you are VERY careful when you set them up, to fund the property, it needs to be done almost exclusively out of your 401k and you just can take money out to fix stuff even if you intend on putting it back into the 401k.
While you can use custodian to help you establish Solo 401k plan - the use of custodian is not required for a 401k. The alternative it to set up Truly self-directed Solo 401k plan, which would allow you to have "checkbook control" over your 401k and eliminate transactions and asset-based fees charged by the custodian. This topic been discussed on the forum many many times so you can learn a ton by searching and reading those older threads. You can start here:
https://www.biggerpockets.com/forums/51/topics/527877-self-directed-solo-401k-for-real-estate-investors-q-and-a
Financing your purchase would require non-recourse loan, here is a list of lenders offering such loans:
https://www.biggerpockets.com/member-blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401k