Self directed 401k plan

8 Replies

Hi BP,

We are looking to rollover a sep IRA and a roth IRA into a self directed 401k or solo 401k. Had anyone used companies like etrade or td ameritrade? If not what other options would you reccomend

@Jason Staine

Firstly, a current Roth IRA may not be rolled over into any version of a 401(k) plan. You would need to look at a self-directed IRA type plan for those funds.

If you are self-employed with no full time employees, a Solo 401(k) is a great retirement plan with some advantages over the SEP IRA in terms of ability to make higher contributions on less earned income, some powerful Roth features for new contributions and in-plan conversions, and availability of participant loans for emergencies.

Wall St firms offer such plans, and even call them "self-directed", but that just means you get to choose from the investments they offer, which will consist of publicly traded stocks, bonds, funds, etc.

If you are interested in a self-directed Solo 401(k) capable of being invested in non-traditional assets such as real estate, trust deeds, etc., then you will need to work with a specialty firm that implements and supports such plans.  Several providers are active participants here on BP and can help you get an understand of how such plans work, what the IRS rules allow for and strategies that will increase your chances of successfully building your retirement savings.

Asking selfishly (but also for the benefit of others)...How might you determine if your IRA is truly self-directed and able to be utilized for real estate investing--is it as simple as calling Prudential, etc?

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Such a study would be difficult, as it involves so many variables related to markets, dollar values, timelines, tax rates of the individuals involved, etc.  The analysis is very different for someone who already has accumulated a decent amount of retirement savings as compared to someone evaluating whether to contribute to a retirement plan in the first place.

Generally speaking, it is best to be as diversified as possible.  This means not only creating income in multiple streams, but also in different tax vehicles.  More highly taxed "today" money is necessary, and it is also beneficial to use the advantages of tax-sheltering inside a retirement plan to compound earnings over time and create a large sum of "tomorrow" money.  

A self-directed retirement plan allows you to pursue that second strategy investing in an asset class you might know and understand better than the stock market such as real estate.  And, the ability to have some retirement funds in equities and some in more stable, income producing assets such as rental property or notes is also a good plan for purposes of diversification.

My common refrain on questions such as this is to be aware of trying to compare apples and oranges.  Retirement plan funds and non-qualified funds produce very different results - even when invested in the same asset class such as rental property - because the tax implications are so different.  A better analysis for most investors is to compare self-directed retirement funds invested into things such as real estate as opposed to leaving those same retirement funds in conventional financial products.  

@Kyle Schlosser

If you have a current IRA or 401(k) with a mainstream financial services firms: Prudential, Schwab, E*Trade, Fidelity, etc. It IS NOT truly self-directed. These firms sell publicly traded assets only.

If you have a truly self-directed IRA, you will know. It is not a "sneaky unpublished option" of a mainstream IRA.

Rather, a truly self-directed IRA or 401(k) will be offered by a firm that specializes in such options. The retirement plans themselves are the same with respect to timelines, beneficiaries, tax treatment, etc. The business model of the plan is what changes, so as to facilitate the more individualized types of transactions that take place in assets such as real estate, privately held companies and other "non-commoditized" investments. Keep in mind, most self-directed plans can also hold conventional stocks, funds, etc. The model is "invest in what the IRS rules allow for", not "invest in what we sell and make commissions on".

This is great information. Much appreciated. Our goal here is be able to invest our 401k in real estate. Yes as you pointed out we are finding the big named brokers like etrade and scottrade do not offer such programs.

@Jason Staine

Many of our clients have used TD Ameritrade for holding the solo 41k funds which can then be invested in real estate. It is the solo 401k providers plan documents that allow for investing in real property, but TD is the custodian of the cash. The same can also be done at E-Trade, Fidelity ans Schwab, and they all provide a checkbook for placing the alternative investments like real estate. 

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