Self directed IRA/Checkbook IRA?????
Homeowner · West Palm Beach, FL · Member since 2013 · 34 posts · 8 votes
I'm looking at a company called Safeguard Advisors who deal in self directed ira's and other investment. I would like to know if anyone has used these guys. If not can anyone offer advised on where to go to open a self directed ira. Thanks in advance Hugo.
The Solo 401K is clearly superior. The reasons for that are many, and as such my list may be incomplete. But here goes:
1. Solo 401Ks do not need a third party administrator or custodian. Once the 401k is set up, you are the trustee. The bookkeeping is relatively simple on a Solo 401K, and you don't even need to file the 5500EZ form until your 401K is worth over $250,000.
2. No custodian means no custodial fees.
3. No delays in transactions due to custodial requirements. I wanted to borrow money from a friend who had a SDIRA. The custodian wanted my Articles of Organization for my LLC, and an Attorney Comfort letter. What the heck is that? Had he had a Solo 401K, he could have written me the check upon receiving the promissory note.
4. Participant loans are available in a 401K whereas your money is tied up until 59 1/2 in an IRA.
5. If used for business purposes, the interest you pay your 401K is tax deductible. PAY YOURSELF AND TAX DEDUCT IT! Not available at all in an IRA. If you want your money bad enough outside an IRA, you pay taxes and penalties.
6. When you invest in real estate using leverage, your transactions are 30 - 50% more profitable inside a 401K vs. an IRA (even a Roth). This is due to the obscure Unrelated Business Income Tax (UBIT). UBIT rockets to 35% even in small profits inside an IRA.
7. Establishing LLCs inside the 401K is easier than an IRA. Again you have custodian hoops to jump through with an IRA.
8. The Roth and Traditional provisions are established immediately on formation of the 401K. Separate accounts aren't needed, and you are trustee for both.
Now, as to who may establish a 401K: ALMOST EVERYONE! A sole proprietor can establish a 401K, hence there is no need for an LLC as far as the IRS is concerned. Unfortunately, most banks haven't received the memo, so your local friendly banker may want to see a "legitimate" business. Forming an LLC makes bank acceptance easier, but not necessary. Your Social Security number is all that's required to sponsor a 401K. That's how I established mine.
Technically, there is a question of parity that may restrict you having a 401K, but that only applies to people who own 50% or more of a business with employees that are covered by no retirement plan, or who only have access to SIMPLE or SEP plans. (This is a completely different rabbit hole, but I mention it to explain the "ALMOST" in "ALMOST EVERYONE!")
As to contributions: If I have old 401Ks from former employers, SIMPLEs, SEPs, Traditional IRAs, TSAs, TDAs, or 403(b)s, I can roll those over to my Solo 401K. I now can borrow money for my own personal use, or to generate income in my own pocket. I can self direct without custodial restrictions, and I can leverage inside my 401K with little or no UBIT. Can I contribute anything from my W-2 income?
No and yes.
I can always, always contribute to a traditional IRA from any source of ordinary income (passive or unearned income cannot be contributed). So if I'm really concerned about contributions, I can contribute to my Traditional IRA, then roll it to my 401K. Roths cannot be rolled to a 401K, so that avenue is closed.
But for most real estate investors, contributions from other sources are negligible. Establishing the 401K allows for real estate investing inside my retirement AND in my own pocket through participant loans. You pay less hidden UBIT tax, and ease of administration priceless. Once your real estate investing becomes profitable enough that you can quit your W-2 job, you start contributing to your 401K from any ordinary income you produce.
There is an excellent book called "Live Tax Free Forever" available on Amazon.com. It's worth a read.
Hugo,
Have not heard of that company, good or bad.
I just set up our (3 Partners) 'check book llc through UDirect IRA Services out of California. I would HIGHLY recommend them.
I did a lot of reading to understand the general concept of a Self Directed IRA before hand also. UDirect or other 'custodians' can not offer 'legal advice'...... they are just the 'facilitators' that make it all flow.
They put me in touch with the Lawyers at KYLER KOHLER OSTERMILLER & SORENSEN, LLP out of Utah (UDirect can provide a whole list of lawyers and lenders once you start working with them). I would also HIGHLY recommend them. I worked with a man named Jarom who was great at helping me work through a lot of very specific questions. Very reasonably priced compared to some of the prices I have heard........ours was $1500 since it was 'multi member' but I believe a single member is around $500.
Good Luck, Dan Dietz
Thanks alot Daniel,
I will look them up in the morning and give them a call on Monday.
I don't believe Equity Trust has a checkbook option.
Hugo, I would highly recommend you look into a self directed 401k rather than a SDIRA. A SD 401k has many advantages over a SDIRA.
I concur, and these advantages have been discussed in great detail here on BP.
I researched a 401 sd and found out that I have to have income besides my w2. If I had 1099's or self employment I could, but as it is I don't qualify. I have to go with a SDIRA. Thanks for the info. I will be meeting next week with several friends that have done some RE investment and maybe get some feedback from them.
@Account Closed - your sponsoring business for your SD401k could literally be selling some used household stuff on Craigslist or Ebay, or selling information or products on-line. You can sign up as a distributor for some product like Juice Plus, LOL, be a little creative. Really, the bar is pretty low, and you can transfer existing IRAs and old 401Ks into it.
Hi David,
Thanks for the info. I did'nt think of that. Point taken, but I'm already in the process of going with the SDIRA. I have already mailed the paperwork and the check to open the account.
As you like @Account Closed , but you can stop payment on the check for a few dollars and call the company to let them know your intentions. (If that's all that's stopping you). You'll save a lot of money over time, have greater flexibility, and have the $50k borrowing feature, which is incredibly nice to take advantage of opportunities that arise.
Hi @Hugo Gort, I saw your postings on BiggerPockets, new to the site and just looking at blogs. Have not heard of that company but hope it worked out. If you decide on a solo401k later (could have both) I think you might look at http://www.sensefinancial.com , I did and are very happy with them. I thought I'd share my experience with solo401k's. I too am employed full time and was looking for a way to make other investments with my IRA and work 401k money. I looked at CDIRA but I settled on a solo401k. I liked the borrowing part of it and the fact that like CDIRA's I could buy gold and silver and real-estate property with it. I too was put off by having to have a side business but I decided to jump in anyway. It has worked out great with Sense Financial Services helping me setup the solo401k and then they helped me setup the checkbook and move some of my IRA and work 401k funds into it. For me creating a part-time business was easy. I already manage my own rentals so I looked for other folks and friends that had real-estate and needed some help. So now I manage a few other properties and that's my side business for my solo401k. Doesn't pay a lot but it works well for me now and maybe I'll expand it once I retire. One of the other benefits I found with Sense Financial Services was that when I had a large loss last year and wanted to take advantage of it by off setting some solo401k distributions they helped with the paper work. Always nice to have someone that knows what they are doing on your side. I'm very happy with them, like I said if you ever decide on a solo401k I recommend them.
Jose
Solo(k)s do offer higher contribution limits, but the salary deferrals are tied to the income you earn in that qualifying business. I've seen people suggest you can have a Solo(k) by doing something as simple as setting up an LLC for selling items on CraigsList or Amazon. While this may be true, the salary deferral you would be eligible to put into that Solo(k) would be tied to the income you earn in that LLC - you can't take earnings from another fulltime job and claim them as salary deferrals into your Solo(k).
The only true difference between using a Self-directed IRA and a Solo(k) when it comes to investing in real estate is that leveraged real estate held in a Solo(k) is not subject to UBIT tax on any income earned. Otherwise, the process and the prohibited transactions are the same across the board.
There are many Self-Directed IRA/Solo(k) custodians out there. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer? How many unique alternative assets do they custody? Do they charge for asset reviews?
Regarding your comment: "I've seen people suggest you can have a Solo(k) by doing something as simple as setting up an LLC for selling items on CraigsList or Amazon. While this may be true, the salary deferral you would be eligible to put into that Solo(k) would be tied to the income you earn in that LLC - you can't take earnings from another fulltime job and claim them as salary deferrals into your Solo(k)."
Yes, I've suggested setting up a "micro" business, and this is perfectly acceptable. The vast vast (did I say vast) majority of folks I come across have old 401k's from prior employers and they want to roll that money over into a self-directed vehicle, and the SD401k is the best way to do this. Yes of course they can't use salary income from an unrelated job to contribute to this SD401k. How does that make the SD401k inferior to an SDIRA?? (It doesn't).
And this: "The only true difference between using a Self-directed IRA and a Solo(k) when it comes to investing in real estate is that leveraged real estate held in a Solo(k) is not subject to UBIT tax on any income earned. Otherwise, the process and the prohibited transactions are the same across the board."
Two huge points you are not mentioning: the up-to-$50k loan that can be taken from the SD401k for any purpose, and the fact that the SDIRA requires an LLC to enable checkbook control (which is the only way I'd invest due to convenience, speed, and lower custodial costs), whereas the SD401k does not need an LLC. LLC's can be quite expensive in some states. And I've read multiple times that IRA/LLC's have a certain taint as regards potential future IRS scrutiny, whereas this doesn't seem to be the case for SD401k's.
You make many good points and know your stuff (naturally since you work in the business)!
I fear my post was misinterpreted. I was not trying to imply one investment tool was inferior or superior to the other, just trying to clarify some differences between the two with regard to real estate investing. The max $50k loan is a "personal use" feature of the Solo(k) and is not related to holding Real Estate within the retirement account. Many custodians offer both SD IRAs and Solo(k)s, it's a matter of finding which type of plan is the best fit for an individual's circumstances.
The Solo 401K is clearly superior. The reasons for that are many, and as such my list may be incomplete. But here goes:
1. Solo 401Ks do not need a third party administrator or custodian. Once the 401k is set up, you are the trustee. The bookkeeping is relatively simple on a Solo 401K, and you don't even need to file the 5500EZ form until your 401K is worth over $250,000.
2. No custodian means no custodial fees.
3. No delays in transactions due to custodial requirements. I wanted to borrow money from a friend who had a SDIRA. The custodian wanted my Articles of Organization for my LLC, and an Attorney Comfort letter. What the heck is that? Had he had a Solo 401K, he could have written me the check upon receiving the promissory note.
4. Participant loans are available in a 401K whereas your money is tied up until 59 1/2 in an IRA.
5. If used for business purposes, the interest you pay your 401K is tax deductible. PAY YOURSELF AND TAX DEDUCT IT! Not available at all in an IRA. If you want your money bad enough outside an IRA, you pay taxes and penalties.
6. When you invest in real estate using leverage, your transactions are 30 - 50% more profitable inside a 401K vs. an IRA (even a Roth). This is due to the obscure Unrelated Business Income Tax (UBIT). UBIT rockets to 35% even in small profits inside an IRA.
7. Establishing LLCs inside the 401K is easier than an IRA. Again you have custodian hoops to jump through with an IRA.
8. The Roth and Traditional provisions are established immediately on formation of the 401K. Separate accounts aren't needed, and you are trustee for both.
Now, as to who may establish a 401K: ALMOST EVERYONE! A sole proprietor can establish a 401K, hence there is no need for an LLC as far as the IRS is concerned. Unfortunately, most banks haven't received the memo, so your local friendly banker may want to see a "legitimate" business. Forming an LLC makes bank acceptance easier, but not necessary. Your Social Security number is all that's required to sponsor a 401K. That's how I established mine.
Technically, there is a question of parity that may restrict you having a 401K, but that only applies to people who own 50% or more of a business with employees that are covered by no retirement plan, or who only have access to SIMPLE or SEP plans. (This is a completely different rabbit hole, but I mention it to explain the "ALMOST" in "ALMOST EVERYONE!")
As to contributions: If I have old 401Ks from former employers, SIMPLEs, SEPs, Traditional IRAs, TSAs, TDAs, or 403(b)s, I can roll those over to my Solo 401K. I now can borrow money for my own personal use, or to generate income in my own pocket. I can self direct without custodial restrictions, and I can leverage inside my 401K with little or no UBIT. Can I contribute anything from my W-2 income?
No and yes.
I can always, always contribute to a traditional IRA from any source of ordinary income (passive or unearned income cannot be contributed). So if I'm really concerned about contributions, I can contribute to my Traditional IRA, then roll it to my 401K. Roths cannot be rolled to a 401K, so that avenue is closed.
But for most real estate investors, contributions from other sources are negligible. Establishing the 401K allows for real estate investing inside my retirement AND in my own pocket through participant loans. You pay less hidden UBIT tax, and ease of administration priceless. Once your real estate investing becomes profitable enough that you can quit your W-2 job, you start contributing to your 401K from any ordinary income you produce.
There is an excellent book called "Live Tax Free Forever" available on Amazon.com. It's worth a read.
I agree with @Mike McDermott that while not everyone could qualify for the Solo 401k, when you compare the two - Solo 401k is the winner! Thanks Mike for spelling out all the reasons!
Try "IRA Services Trust"...a lot less expensive than other custodians and service is as good as Equity Trust, except for the educational component which frankly you can get off their website for nothing.
@Mike, can a partnership be formed under solo 401k?
The partner that owns solo 401k will contribute the 25% down payment
The other partner will seek non-recourse loan. The property will then be bought into the LLC, and both partners are the trustee.
@Chan K.
A partnership can adopt a solo 401k plan, and the partners can make annual solo 401k contributions.
Can someone recommend a bank that actually does allow SD401k w/checkbook control?
I have already set up the Solo 401k with a company, but need a bank that facilitates it.
I just found out, the hard way, that the bank I was using does not. It took me a while to educate them on what it was and when they called someone at a higher level, they informed me that they no longer do that.
Any help is appreciated
Your plan facilitator should be more than willing and able to help you with this issue. There should be no need to come to BP for this type of basic support.
Most any bank or brokerage will be able to open the type of trust account required for a Solo 401k. Of the major banks, Wells Fargo seems to have the best trained staff. We also like Schwab and Fidelity.
@Kelly D.
The solo 401k provider that you went with should provide a banking guide. You can also read my bigger pockets blog on this topic.
Thanks everyone for the help.
Im sure its a simple thing to accomplish but so far my experience has gotten me the deer in the headlights look and then the spiel on how to open a normal account.
In my experience so far most people, bankers too, have no idea what a SD IRA/401k is and what to do with it.
I think I have the right bank now and thank you all.
Real..real ....good stuff here......
thanks very much David, Mike, Doreen for valuable info.
I and my wife have some money in 401K with our previous employers and we were thinking SDIRA with Checkbook/LLC option. However, based on above, I believe (please correct me if I am wrong), we can set up Solo401K and transfer that money into it..correct?
If Solo401K doesn't require custodian/third party, who will hold my money? Would it be with any bank like Chase or US Bank? Would I require an attorney, administrator or any professional/CPA to set up Solo401K??? Would appreciate some more inputs and specific info,
Thanks!