Hard money vs. Old 401k?

Question

Hello BP enthusiasts...My first two flips were successful, but like most, raising capital is a challenge.  For our next two flips (both under contract)-- advisable to use Hard Money or my old (separated from employer) 401k?  Hard money is expensive, yet I get penalized 20% for an early withdrawal from my 401k.

Lastly, deposit capital directly into personal account AND THEN into my LLC account?  Or okay to deposit directly into my LLC account?  I'm slightly aware of the dangers of commingling retirement funds/personal funds.

Dmitriy Fomichenko · Answer

@Dymond Shafer congrats of your two successful flips!

You could rollover your old 401k into truly self-directed Solo 401k plan, and then invest in real estate under your 401k. However, your 401k would not be able to invest into or fund your personal flip. You are considered to be disqualified person to your 401k and the IRS rules prohibit any transaction between qualified plan and disqualified person.

Taking early distribution not only will be subject to penalties, but also to taxation on both state and federal levels, as a result you may end up losing 40-50% of your 401k balance, not a wise thing to do. One way to access your retirement funds to put into your own deal is to take a participant loan from your Solo 401k, the loan is limited to $50,000 or 50% of the balance, whichever is less.

Hope this helps!

Clay Sellers · Answer

Wait, correct me if I'm wrong @Dmitriy Fomichenko, one can use their Solo 401k to fund "their" deals. However, they are not really "their" deals. The deals made are technically deals of and for the growth of the Solo 401k.

I think the confusion here @Dymond Shafer is that the deals you do with funds for the Solo 401k are strictly for the purposes of building up that Solo 401k account (as it's own separate entity). , until such time as you can legally start taking disbursements as a retirement withdrawal. You can not profit from the proceeds of the Solo 401K. All profits need to go back into the 401K. I think the issue here might be with the phrase "personal flip"?

Does that sound correct?

For example (a very simple one): If I have $150K in my Solo 401K, I can purchase a home for $50K (cash)  from my solo account and use $25K from the same account to rehab the home. Now, if I'm flipping it, the principal and any gains from that deal need to go back into the Solo 401K. I can't personally benefit from it at this time.

Correct?

Clay Sellers · Answer

@Dymond Shafer, I've been speaking to @Dmitriy Fomichenko about rolling over my old 401k to a Solo 401k to use for REI. After reading @Larry F. 's   The Holy Grail Blog posts, I believe it's the best thing I can do with my money right now. Dmitriy and his team come highly recommended. Check out their testimonials page. There might be some familiar names on there. Do some more research. Don't let that money waste away in your old 401k. (Great Marketing Slogan, btw, right?)

Justin Windham · Answer

@Clay Sellers

@Dymond Shafer

Another way to think of it is that when you invest your 401k funds into a deal, your 401k (not you) will receive the investment returns. While the 401k is for your benefit later on, it really is a different entity from yourself. You pay taxes on income, while the 401k generally does not, so there is a definite difference.

Dmitriy Fomichenko · Answer

@Clay Sellers your understanding is correct.

For @Dymond Shafer and other readers, remember this: your 401k is not YOU, and you are not your 401k. 401k is a separate entity from you. You are controlling your 401k, you invest your 401k, and you will benefit from your 401k in the future (not today). So in our minds it must be clear: when you are investing your 401k funds - it is not "your" deal, it is an investment of the 401k.

Justin Windham · Answer

@Dymond Shafer

The Solo 401k is a qualified plan under IRS guidelines, so no taxes or penalties are due on funds transferred in from another employer 401k.

Dmitriy Fomichenko · Answer

@Dymond Shafer, there are no tax consequences or penalties when you rollover from one retirement plan to another retirement plan.

George Blower · Answer

@Clay Sellers

Wether investing IRA or solo 401k funds in real estate, you are correct that you cannot use the solo 401k owned property for personal use.

To learn more about the IRA and solo 401k prohibited transactions, see the following.

https://www.irs.gov/retirement-plans/plan-particip...

https://www.irs.gov/retirement-plans/retirement-pl...

George Blower · Answer

@Dymond Shafer

You may want to consider transferring your former employer 401k to a self-directed IRA which can be invested in real estate. See the following IRS page.

https://www.irs.gov/retirement-plans/retirement-pl...

Dmitriy Fomichenko · Answer

@Dymond Shafer

You can't use your 401k to fund your own deals, period (directly or indirectly). Except the strategy I mentioned earlier, taking a loan from your 401k. This is not an area you want to look for loopholes, indirect prohibited transaction IS a prohibited transaction.

Hard money vs. Old 401k?

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