401k rollover to purchase rental property

[Jeff Wallace]

I would like to hear feedback from anyone who has successfully used a Rollover as Business Startup (ROBS) or a Business Owners Retirement Savings Account (BORSA) to use assets in a 401k to fund investment real estate purchases. Has it been a positive experience or overly cumbersome? I am aware of the potential to roll assets in to a self directed IRA, however that option doesn't appeal to me since I wouldn't be able to use the rent income until 59.5 (my goal is to resign from my current job and would like the income to replace my salary). Thanks, jeff

[Michael O'Byrne]

@Jeff Wallace , 

I opened a BORSA with an accounting firm here in Houston this past May. It's too early to tell how really cumbersome it is with regard to accounting, taxes, annual filing, etc., because I haven't worked through most of it yet in practice, but it seems relatively straightforward. The main thing is to avoid triggering a "distribution" by following all the federal rules for maintaining and managing your new 401K. Still worth it of course, but the main drawback for me is the extra hassles of managing a C-corp vs. a sole proprietorship or LLC, e.g. double taxation on FICA and Medicare, paying workers comp tax, and having to buy general liability insurance for lawsuit protection. I priced $1,000,000 per occurance GL insurance recently, and it will cost me almost $5,000 per year (based on rehabbing 10 houses per year). Keep in mind that under the BORSA arrangement, your new 401K actually owns the C-corp because it holds all the shares of stock, which seems to me more vulnerable to lawsuts than operating as a LLC. So, I am investigating a way to form a LLC under the BORSA C-corp to do business. As I understand it, you can't form a stand-alone LLC and borrow funds from the C-corp to do rehabs or it will count as a distribution/withdrawal of your 401K funds, and you will have to pay the income tax and early withdrawal penalties on the entire 401K. Finding an attorney or CPA to form the LLC under the C-corp is proving to be challenging as most of them aren't familiar with the BORSA set-up and don't want to be held liable if a distribution event is triggered.