New Member in Knoxville, TN

10 Replies

Recently discovered BP while doing research on self-directed IRA / solo 401K accounts and am looking forward to participating in this community. My wife and I enjoy living in Knoxville and we have 3 daughters who keep us busy. Began investing independently in 2014 and have 2 investment properties with friends that have been a positive experience thus far. Would like to invest further in real estate and someday retire on the lake in East Tennessee.

Am also interested in learning more about the pros and cons of using a self directed IRA / solo401K for real estate investing. My questions are whether this should be an IRA or a solo 401K, is this better as a Roth account or not and long term implications for both. Have only touched the surface of this and reading more to gain a true understanding of this and whether this would be the right decision for us. Have only been a member for a few days and I thank to thank the community for sharing their knowledge and experiences.

@Kevin Brinkmann

Investing in real estate with a tax-sheltered IRA or 401k plan can be a great way to diversify your retirement savings into a real asset that produces regular income. Ultimately, that is the key thing to consider when looking at these plans - what will you invest in and what kind of portfolio can you build?

Whether you should be operating with an IRA or 401k depends on your situation. Pretty much anybody can setup an IRA. The Solo 401k is only available to folks who are self-employed and have no full time employees.

Likewise, the tax-deferred vs Roth decision is very complex and involves factors such as your age, investment goals & experience, the type of account(s) you have currently, the tax burden of converting from tax-deferred to Roth status, and a whole lot of other considerations.

You can discuss the various plan options with professionals in the self-directed field, and that would be a good starting point, but you will want to have a discussion with your CPA and/or fee-only CFP who understands real estate.  The self directed retirement plan is a tool that you will use as part of your overall wealth building strategy.  Creating that strategy is the real thing to focus on.

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@Kevin Brinkmann

Welcome to BP!

Generally, the Solo 401k is the best option for those who qualify because of the benefits the plan offers beyond those of an IRA. If you are not eligible for a Solo 401k, a self directed IRA or IRA LLC can be a great way to access a large platform of investments.

As pointed out already the decision of Roth vs traditional (non-Roth or tax deferred) should involve a number of factors. However, often among those factors is how long you intend to be able to invest with the account(s) before retiring. Oftentimes it is suggested that Roth is a better option the longer you will be able to grow those funds. Another consideration is your current tax rate vs your expected tax rate in retirement. For some, the difference between the two suggest that there may be more benefit to getting the tax break either now (non-Roth) or later (Roth). The Solo 401k offers both traditional and Roth options within the same plan.

Thank you for your advice.  Am interested in learning more about the advantages of the Solo 401K.  I qualify for that plan and am working through some questions from my reading to help me decide which route to take.  Still at that stage where every question leads to another question and I enjoy that journey.  Will keep searching the site for further information.  If you have other sources that you think I might benefit from reviewing, then I would appreciate anything you have to share.

@Kevin Brinkmann Welcome to BP. I think you come to the right place to learn about real estate investing and Solo 401k.

To answer your question about the advantages of the Solo 401k, I think you already have some ideas to how the plan works. Just like SD IRA, a self-directed Solo 401k allows real estate investing. A Solo 401k can accept up to $59,000 in annual contributions (also depending your income), which is much higher than an IRA. When it comes to real estate, both plans can use non-recourse financing. However, the use of non-recourse financing will lead to Unrelated Business Income Tax with an IRA, but a Solo 401k can take out a non-recourse loan tax-free. This is something to consider if you plan to use leverage.

The Solo 401k can also be simpler to set up, because there is no custodian required, hence you don't have to set up a special purpose LLC as with a SD IRA.

With either plan, however, there are certain rules you have to play by. For example, you have to avoid commingling of Solo 401k funds and personal funds. I recommend doing more research on this topic to avoid unnecessary penalties and other tax consequences.

@Dmitriy Fomichenko Thanks for the reply!  Have been working through my questions to get to know the details of the Solo 401K plan.  I think this is the right plan for me and would ultimately like to set this up whereby I could have both a 401K and a Roth 401K plan but am uncertain if this is possible. 

@Kevin Brinkmann

Yes you can have both traditional (pre-tax) 401k and Roth 401k in the same plan as long as your chosen provider offers this. You might also want to look for a plan that allows for in-plan Roth conversions as this can give you more flexibility if you decide you'd like to increase the amount of Roth funds you have.

If I understand correctly, then I can contribute up to $18000 a year ($24000 if over 50) into a 401K Roth. Am assuming the total that I could invest per year in my Solo 401K/Roth 401K combined would be $53000 ($59000 if over 50) or are Roth Contributions separate from non Roth contributions in determining the maximum I can contribute per year?

Have searched and am developing a list of brokerage firms that allow for a Solo 401K, Roth 401K, loan options, check book control and brokerage services and not sure if some brokerage firms have limitations that others don't as far as other plan components or investment options allowed.

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