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Ria Gupta
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IRA LLC versus Solo 401K versus SDIRA

Ria Gupta
Posted Mar 8 2023, 13:49

I am in the process of figuring out the pros and cons of IRA LLC versus Solo 401K versus SDIRA to lend funds out of, for a short term real estate project. Can someone provide insights or resources?

Thanks,

Ritu

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Brian Eastman
  • Self Directed IRA & 401k Advisor
  • Boulder, CO
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Brian Eastman
  • Self Directed IRA & 401k Advisor
  • Boulder, CO
Replied Mar 8 2023, 15:25

@Ria Gupta

There is no single answer.  Qualification, funding type, specific investment type and geography, and many other factors go into determining the correct format for a specific individual.  There are several quality providers of self-directed retirement plans active on Bigger Pockets who will be happy to help you identify the best plan for your needs. Get on the phone and you will learn quickly where to focus your research.

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Jeffrey Dixon
  • Irvine, CA
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Jeffrey Dixon
  • Irvine, CA
Replied Mar 8 2023, 15:42

You have to be self-employed with your own business to be eligible for a Solo 401k Account. That business or any business you are an owner in cannot have other full time employees. You need to talk with a self-directed company to discuss the pros and cons. 

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Dmitriy Fomichenko#1 New Member Introductions Contributor
  • Solo 401k Expert
  • Anaheim Hills, CA
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Dmitriy Fomichenko#1 New Member Introductions Contributor
  • Solo 401k Expert
  • Anaheim Hills, CA
Replied Mar 8 2023, 16:54

@Ria Gupta

In most cases Solo 401k is superior vehicle (if you are eligible for it). Here are some of the advantages:

- Contribution limits 10X higher than an IRA

- No need for a custodian 

- Checkbook control with out the need for an LLC

- Lower cost to set up and maintain 

- Ability to take participant loan 

- Roth contributions are not subject to income limits

- Exempt from UBIT on leveraged real estate

- and more!

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Curt Smith#4 Innovative Strategies Contributor
  • Rental Property Investor
  • Clarkston, GA
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Curt Smith#4 Innovative Strategies Contributor
  • Rental Property Investor
  • Clarkston, GA
Replied Mar 9 2023, 05:21

@Ria Gupta The above are experts in the SD-IRA/solo k space. We've started with a big well known custodian who doesn't allow check book LLC under a SD-IRA and was miserable with trying to run rentals and buy houses. BUT any custodian will be ok lending funds from. The latest tax bill / IRS regs (??) are wittling away at check book LLCs under SD-IRAs so watch out jumpig into that. IMHO you do not need a check book LLC for lending! Check book LLC was/is useful if not necessary if you are running rentals, buying / selling houses and need funds fast. Custodians are not good at "fast". But they are fast enough for lending. We did create an "active business" that qualifies us for a solo-401k and we retitled our rentals into the solo-k. Was expensive and miserable but necessary to get away from this "big" named custodian. The smaller ones repped by the posters above are much much better at speed and helping you do your deals. Like they said above, call a few and learn and any here (to my past reading) are great.

BUT I always dig into new folks wanting to "lend" and often find that the lending is on deals that probably sould not be lent to!!!   Please please learn how to vet/underwrite/qualify whata deals you lend on.   Be secured with a 1st position lien with EQUITY.   Be sure you would want to own that deal if (when) the borrowr defaults.   Also;  please don't lend to friends and family!!  Its the surrest way to ruin friends and family relationships.   Deals never NEVER go as planned especially if everyoone is new to real estate.

Best of luck, curt

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Jeffrey Dixon
  • Irvine, CA
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Jeffrey Dixon
  • Irvine, CA
Replied Mar 9 2023, 09:02

Keep in mind there are family members you cannot use your IRA funds with.

Who’s Disqualified
  • you
  • your spouse
  • your parents and/or your adoptive parents
  • your natural grandparents
  • your natural children and/or your adopted children
  • your stepchildren
  • The spouse of your natural children
  • your grandchildren
  • Any fiduciary
  • Any people providing services to your IRA

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Daniel Dietz
  • Rental Property Investor
  • Reedsburg, WI
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Daniel Dietz
  • Rental Property Investor
  • Reedsburg, WI
Replied Mar 9 2023, 13:12
Quote from @Curt Smith:

........  The latest tax bill / IRS regs (??) are wittling away at check book LLCs under SD-IRAs so watch out jumpig into that. 


Curt, I had not heard of this aspect of the recent Bills dealing with these kind of funds. Can you explain more or point us to a link that tells more?

Thanks, Dan Dietz

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Jeffrey Dixon
  • Irvine, CA
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Jeffrey Dixon
  • Irvine, CA
Replied Mar 9 2023, 13:44

Your Self-Directed account faced threats in 2021 from the Build Back Better Act. Now those threats are off the table.


Starting September 13, 2021, the House began its deliberation of the BBBA.

Section 138312 of that Act was set to disallow assets in IRAs if the IRA holder had to prove a certain minimum level of assets, or if an income level was required. It would have disallowed assets if the investor had to have completed a minimum level of education or obtained a specific license or credential. That would have eliminated private placement investing in IRAs.

Section 138314 said IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. This provision would have put an end to the IRA-Owned LLC (also known as the "Checkbook IRA").

These two sections were removed before the bill was approved by House, which passed their version of the Bill November 24, 2021.

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Don Konipol#1 Innovative Strategies Contributor
  • Lender
  • The Woodlands, TX
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Don Konipol#1 Innovative Strategies Contributor
  • Lender
  • The Woodlands, TX
Replied Mar 9 2023, 14:44

@Curt Smith

“BUT I always dig into new folks wanting to "lend" and often find that the lending is on deals that probably sould not be lent to!!! Please please learn how to vet/underwrite/qualify whata deals you lend on. Be secured with a 1st position lien with EQUITY. Be sure you would want to own that deal if (when) the borrowr defaults. Also; please don't lend to friends and family!! Its the surrest way to ruin friends and family relationships. Deals never NEVER go as planned especially if everyoone is new to real estate.

Best of luck, curt”

Can not say it any better that that!


Btw, while on the subject, there is an advantage to Roth IRA over the Roth 401K. Roth 401K requires minimum withdrawals at 72.5 years old although the withdrawals are not taxed. Roth IRA does not require and withdrawals, so if not needed to live on that money can continue growing tax free

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Steve Hodgdon
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Steve Hodgdon
  • Investor
  • Novato, CA
Replied Apr 4 2023, 09:01
Quote from @Jeffrey Dixon:

Your Self-Directed account faced threats in 2021 from the Build Back Better Act. Now those threats are off the table.


Starting September 13, 2021, the House began its deliberation of the BBBA.

Section 138312 of that Act was set to disallow assets in IRAs if the IRA holder had to prove a certain minimum level of assets, or if an income level was required. It would have disallowed assets if the investor had to have completed a minimum level of education or obtained a specific license or credential. That would have eliminated private placement investing in IRAs.

Section 138314 said IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. This provision would have put an end to the IRA-Owned LLC (also known as the "Checkbook IRA").

These two sections were removed before the bill was approved by House, which passed their version of the Bill November 24, 2021.

Just because these clauses were removed, it doesn't mean they aren't coming back. Common way to whittle down opposition is to let them win early and then lose later.