Checkbook Control 401k--Ways to use for RE?
Investor · Des Moines, IA · Member since 2013 · 137 posts · 49 votes
My wife and I are beginning to pool funds to begin a real estate investing venture. I have a 401k from a former employer that I would like to leverage to our new business. I have been researching "Checkbook Control" Solo 401(k)s here and on the web... I like the idea of being able to cut a check from my 401(k) to use in my business! It's easy to find info on WHAT they are, however it isn't exactly clear HOW I can use those funds in real estate endeavors.
I would like to hear how you have used these funds in your RE investing. As always, the more creative the better! Conversely, are there any prohibited transactions I should watch out for?
Matt
In a way, pretend that it's someone else's money. You cannot use it in such a way that the money will go into your own pocket, it has to go back to the plan.
For example, if you were to take a portion of the money and put it in your own personal bank account, then you'd have to pay taxes (and penalties) for taking that money.
If you use the money to buy a property, you cannot self-manage that property or do any work on that property yourself. Pretend it was someone else's money -- would you work for free? Of course not, you'd get compensated. The rental income and expenses would go back into the retirement account.
Now keep in mind that you CAN generally take a personal loan from the Solo 401(k) plan, and pay it back with interest. That limit is 50% or $50,000 whichever is less. So in that one sense you could personally benefit from the Solo 401(k) plan however you are paying the plan back with interest.
You could also loan out other money as an investment out of your Solo 401(k) to other real estate investors, and get a return. (Example: they are doing a flip.)
There are many ways to use your Solo 401(k) for real estate investing. I've given some broad sweeping examples and generalizations and so you'd need to check with your own financial situation and Solo 401(k) plan administrator (and financial adviser, and maybe CPA) to make sure what is right for you.
I spoke with my attorney yesterday about setting up my LLC. He definitely isn't an expert at 401(k) and didn't claim to be (he's good at RE though) and he suggested it's better to use the solo 401(k) to loan to my biz, but thought it was very complicated to put real estate into the plan... I've read that there are lots of specific rules, but I've never really thought of it as 'complicated'. What do you guys/gals think?
Matt, while investing in real estate is very common use for many self-directed Solo 401k plan participants, this is not the only option that is available. With truly self-directed Solo 401k your investment options are virtually limitless. It all depends on individual knowledge, comfort level, risk tolerance, having the right expert on your team, etc. etc.
Also, the suggestion of your attorney to lend to your business needs to be examined. While Solo 401k plan allows participant loans which gives you access to your retirement dollars tax-free and penalty-free for up to $50K or 50% of the account balance, lending to the business that you own directly will be a prohibited transaction. It is very important that you take advice from the expert in the field.
Take care!
Wow, @Dmitriy Fomichenko, that is great to know. I dont understand why there would be a provision allowing lending, unless it was to another biz at a higher interest rate...? As a sort of income stream for the 401(k)...? Although, I guess I can see why lending to myself with "tax free" money would be a conflict of interest and taxable.
the IRS defines you (or any business or entity that you own) as 'Disqualified' for the purposes of your retirement account. Any transaction between your 401k and Disqualified Person is prohibited as it can be a conflict of interest. Therefore your 401k can not conduct any business (loan, etc.) to your business.
To learn more about the solo 401k prohibited transaction rules see the following links.
http://www.irs.gov/irm/part4/irm_04-072-011.html
http://www.irs.gov/publications/p560/
Wow, @Dmitriy Fomichenko, that is great to know. I dont understand why there would be a provision allowing lending, unless it was to another biz at a higher interest rate...? As a sort of income stream for the 401(k)...? Although, I guess I can see why lending to myself with "tax free" money would be a conflict of interest and taxable.
Hey Matt,
The loan provision refers to your ability to take a personal loan from the 401k plan, up to $50k or 50% of your vested balance, whichever is less. You can use your self directed 401k to make loans to other businesses via promissory notes at any interest rate you can set with the borrower. Prohibited transactions are almost exclusively self-dealing or co-mingling issues, as long as you or any other disqualified person (direct decedents and ascendants, immediate family, company you have a large ownership stake in etc) doesn't directly benefit from the transaction you will probably be ok.
Most people are very intimidated because it seems like there are so many more rules with self-directed IRAs, there really isn't. You can't do any of the things in a traditional wall street firm held IRA that you can't in a SD IRA. Most people find that they have no issues with SD IRAs because the rules are fairly simple and straightforward.
You can find more in depth info on prohibited transactions and disqualified persons here.
http://www.irs.gov/Retirement-Plans/Retirement-Pla...
It's a surprisingly concise overview on the whole topic.
Hopefully that helps
Adam
Glad I found this forum! Had several questions about making my Roth IRA into a 401(k). I do work for myself so I believe I can either convert it or start my own new 401(k).
I look at it this way, and if I am wrong please let me know: If I worked for a business that I did not own and had a 401(k) I could borrow against it. Many of my friends have loans against their 401(k). They blew the money on who knows what. If I have a 401(k) and I own the business, I can borrow against it. If I used the loan proceed to buy real estate (it would be in my own name) as long as I was paying back the 401(k) it would be ok. Could use it for a trip or buy a car. Doesn't matter
Now if I want my 401(k) to invest in something there are strict rules. For example if I wanted the 401(k) to invest in a property. That would be different then simply my borrowing against it.
Does it seem like I have it right, in general?
A Roth IRA may not be rolled over into a Solo 401k. So if you wish to diversify outside of the stock market, you would need to look at a self-directed IRA for those funds.
The 401k loan is the same whether you are the employee of someone else's plan or your own plan. Personally, I feel it is a strategy for those who are not too sharp with math, since you borrow the pre-tax money and repay with post-tax dollars. Hard money is generally less expensive than the 25-30% tax bracket most folks with a good enough job to have a 401k are in, and that 25-30% is what that loan is really costing you.
A solo 401k is a fantastic program if you are self employed, as it provides a great opportunity to build your retirement on either the tax-deferred or Roth side, and the ability to invest as you see fit rather than being limited to what the guys on Wall St are selling.
You are correct that there are some restrictions when you choose to invest your IRA or 401k into real estate. It is not money added to your personal real estate investing capital pool, but rather a means to diversify that locked-away retirement savings into assets you can choose and control via the plan.
IRS Publication 590 is where you will find information regarding the ROTH IRA rollover to a qualified plan including a Roth solo 401k restriction.
http://www.irs.gov/uac/About-Publication-590
The main reason why a Roth IRA cannot be transferred to a Roth Solo 401k include the distribution rules applicable to Nonqualified distributions (that is, distributions made before age 59 1/2 and before the 5 year holding period has been satisfied).
Specifically, unlike Roth IRAs where the distribution ordering rules apply to nonqualified distributions (e.g., the contributions are distributed first, followed by amounts converted to Roth IRA and then earnings), when nonqualified distributions are made from a Roth Solo 401k plan, distributions are pro-rated between Roth Solo 401k contributions (nontaxable) and gains (taxable).
Lastly, interesting enough Roth IRAs are not subject to required minimum distributions (RMDs) whereas Roth solo 401k plans are; as a result and from a planning perspective, Roth solo 401k clients will often transfer their Roth solo 401k to a Roth IRA before reaching age 70 1/2 in order to eliminate the RMD requirement.
Here is a link to a good Roth IRA and Roth Solo 401k comparison chart:
http://www.irs.gov/Retirement-Plans/Roth-Comparison-Chart