Investor · Knoxville, TN · Member since 2016 · 10 posts · 2 votes
I have some questions in regards to investing in Notes with a Solo / Individual 401K or SDIRA. There are a couple discussions that promote investing in Notes through an LLC for some added liability protection. For those who have an Individual 401K plan and have invested in Notes, did you create an LLC within your retirement plan through which to invest in Notes or did you structure your investments differently and if so how? For those who have used your SDIRA for Note investing, did you create your plan as an SDIRA LLC plan for this purpose or did you use a different approach? Appreciate any advice and feedback that the community can offer.
Investor · California, CA · Member since 2016 · 367 posts · 375 votes
9y
To have checkbook control SDIRA, you'll need an LLC. I have mine structured this way and would recommend it. You don't have to go to the custodian every time you need to cut a check or wire money. Your LLC "owns" the checking account, you as the manager have direct control of the funds in that account. You have to be aware of, and follow the rules to avoid prohibited transactions (which isn't that complicated). You won't have the custodian looking over each transaction to protect you from making a mistake. Of course you can always call them before any transaction to make sure.
It's more expensive to set it up this way initially, but then you have control (=speed), and don't have to pay fees on each transaction. Over time, the fees you would otherwise have to pay, will offset the up front cost of setting up the LLC. You can fund deals much more quickly since you don't have to rely on the SDIRA custodian to do it for you, at their pace, which can be slow (I've heard)
Solo 401k's have many advantages over SDIRA, so if you have the option, you should do it that way.
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
9y
I fund notes through my SD IRA. My wife funds notes through her Solo 401k. We did not create an LLC for either account and I can see no reason to do so.
With a Solo 401k, the two main options for structuring these investments are
1. To invest into notes directly with the 401k trust (the entity created to hold the 401k plan assets and allow you to control those assets as trustee).
2. An LLC that is created, the member of which is the Solo 401k trust. As manager of the LLC, you control it much the way you would an IRA LLC. The 401k-owned LLC is a bit less common than with an IRA because the IRA requires an LLC to have checkbook control, while the Solo 401k trust does not. That said, many people do prefer to have the LLC in place for asset and liability protection purposes.
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
9y
Hi @Kevin Brinkmann I would strongly suggest that you use an entity like an LLC for both asset protection and privacy. I buy notes in my SDIRA using a checkbook control LLC and also put the note into a personal property trust, which is a private document, not filed publicly and would require a court order for discovery. This way your retirement account is "double insulated" for privacy and liability protection.
Feel free to contact me directly and I'll send you info on setting up trusts.
Investor · California, CA · Member since 2016 · 367 posts · 375 votes
9y
To have checkbook control SDIRA, you'll need an LLC. I have mine structured this way and would recommend it. You don't have to go to the custodian every time you need to cut a check or wire money. Your LLC "owns" the checking account, you as the manager have direct control of the funds in that account. You have to be aware of, and follow the rules to avoid prohibited transactions (which isn't that complicated). You won't have the custodian looking over each transaction to protect you from making a mistake. Of course you can always call them before any transaction to make sure.
It's more expensive to set it up this way initially, but then you have control (=speed), and don't have to pay fees on each transaction. Over time, the fees you would otherwise have to pay, will offset the up front cost of setting up the LLC. You can fund deals much more quickly since you don't have to rely on the SDIRA custodian to do it for you, at their pace, which can be slow (I've heard)
Solo 401k's have many advantages over SDIRA, so if you have the option, you should do it that way.
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
9y
@Bob Malecki, that seems like a lot of effort for a dubious benefit. When I fund (or buy) notes through my SD IRA the only identifier is the custodian's name and my account number. My name does not appear on any paperwork. I consider that private.
There is not much liability to be concerned about when you own notes. Now, if you own a rental property that is a different story... Some people may try to convince you to do it through an LLC but I agree with @Jeff Rabinowitz that this is an overkill.
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
9y
I suppose that for one note it would be overkill, but if you are buying and selling debt like I do, having a checkbook control LLC makes life much easier.
what Kevin was asking about is adding an LLC to the Solo 401k plan. I agree with you that having an LLC added to your IRA to gain the checkbook control makes life much easier when you do multiple transactions. However with the truly self-directed Solo 401k plan you don't need an LLC to have a checkbook control.
With the Solo 401(k), a LLC is not necessary. The plan itself provides you the checkbook control necessary to effectively invest in notes.
You could choose to form a LLC under the umbrella of a 401(k) as a means of creating asset segregation, but since notes generate very little in the way of liability, that is probably not necessary. If you will be doing a lot of lending and/or want to create privacy, then having some segregation or anonymity via the use of trusts, for example, may be desirable, but would you really need that?
A more common use of a LLC within a Solo 401(k) is to create segregation between assets that create liability risk and those that do not. If you had a large portfolio with cash/stocks, real estate, and notes, for example, it might be prudent to put the real estate into a separate LLC owned by the Solo 401(k) plan. Then, if there were a suit and judgement associated with the property, only that LLC would be subject to claims and the other assets held in the 401(k) would be afforded liability protection.
what Kevin was asking about is adding an LLC to the Solo 401k plan. I agree with you that having an LLC added to your IRA to gain the checkbook control makes life much easier when you do multiple transactions. However with the truly self-directed Solo 401k plan you don't need an LLC to have a checkbook control.
Investor · Knoxville, TN · Member since 2016 · 10 posts · 2 votes
9y
@Bob Malecki, @Jeff Rabinowitz, @Justin Windham, @Mark Nolan, @Tim S., @Dmitriy Fomichenko, @Brian Eastman, Thank you for your insight into this! Have been researching self directed retirement accounts for some time. Want to make sure I have a handle on understanding all the liabilities/risks with each investment. Appreciate your taking the time to respond and may reach out again for some more insight into this with regards to Note Investing. Cheers to all!
Rental Property Investor · Fort Lauderdale, FL · Member since 2015 · 65 posts · 15 votes
9y
Be very careful when you set up a SD IRA LLC and seek legal counsel. Although there haven't been many court cases proving this, the IRS could disqualify your entire IRA if they think you are self-dealing, by actively managing your investments. To avoid that nightmare ideally you should name a sibling or another 'qualified person' as the managing member of the LLC (not yourself). You can still be involved and write checks, but keep it under the radar ;)
@Jeff Rabinowitz I'm not sure how your LLC's manager's name would not appear on your loan servicer's set up documents? They'll require signatures of an authorized contact person... unless you are self-servicing (which is definitely not recommended). Yes, your entity name will be the only one that appears on publicly recorded documents... but it's best to play it safe here.
Kevin is actually discussing the use of a LLC within the confines of a properly established 401k plan as a means of asset protection. The IRA LLC structure you mention is a different thing entirely.
That said, the IRA LLC has been around for 20+ years and the IRS is very much aware of this strategy. While it is possible to create difficulties by being too hands on, the somewhat alarmist tone you are sounding is just that, alarmist.
When properly established and utilized, a self-directed IRA or Solo 401(k) should not have any issues in the event of an IRS audit. We have been through several (not a lot, but enough) with our clients over the years to be able to state this with confidence.
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
9y
@Josh Thomas, my custodian has my name, of course. I do not use a LLC. My name does NOT appear on publicly recorded documents. I use only my custodian's name and my account number. This is a retirement account. It is an entity itself. My name is not required on mortgages purchased through the account.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Originally posted by : @Josh Thomas
Be very careful when you set up a SD IRA LLC and seek legal counsel. Although there haven't been many court cases proving this, the IRS could disqualify your entire IRA if they think you are self-dealing, by actively managing your investments. To avoid that nightmare ideally you should name a sibling or another 'qualified person' as the managing member of the LLC (not yourself). You can still be involved and write checks, but keep it under the radar ;)
Josh, what you say doesn't make a lot of sense. First of all, your IRA has to be the member, not you or your sibling. You are the manager. But making your sibling a manager defeats the whole purpose of IRA LLC which is to be in control of your retirement funds. As long as you control/manager the assets and don't do any labor you should not have any issues with the IRS. Also, if you get involved in a prohibited transaction without the use of an LLC your entire IRA will still be disqualified, the LLC doesn't really increase the risk of it. The bottom line is you must understand and follow the rules.
Rental Property Investor · Fort Lauderdale, FL · Member since 2015 · 65 posts · 15 votes
9y
@Dmitriy Fomichenko Right, well it's actually your SD IRA Custodian who will be the sole member of the LLC. I'm simply recommending you avoid naming a non-qualified person as Managing Manager in the Documents Of Organization or any documents signed on your entity's behalf. Non-linear family members are qualified. I agree you should not have any issues if you do name yourself and follow all the formalities... just a word of advice since a self-dealing judgement would wreck your retirement plans.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Sorry @Josh Thomas, I don't agree with you on this, if it's your IRA then you should be the manager of the LLC (you keep saying managing member, this is incorrect, you can't be the member regardless managing or not). Why would you give control to someone else???
Rental Property Investor · Fort Lauderdale, FL · Member since 2015 · 65 posts · 15 votes
9y
@Brian Eastman Ah yes an LLC inside a Solo 401k is a much different animal. I wish I could have one, but I'm still W2 for now. I'm glad to hear the audits you handled went well. I guess I'm a bit overly careful, just in case they decide to scrutinize these types of entities in the future.
I have to join in with @Dmitriy Fomichenko on this one. You came into a thread with a non-sequitor and are putting forth advice and cautions, while it is quite clear to anybody with extensive knowledge in this field that you do not have any specific or relevant expertise or background in the field you are speaking of.
Bigger Pockets is a fantastic resource, but this type of interjection without foundation is exactly what makes such a site dangerous to those new to a field and looking for information.
As experts in this field, Dmitriy and I spend a considerable amount of time and effort providing helpful, relevant and meaningful information on the topic of self-directed retirement plans to the BP community.
I would ask that if you are not providing relevant expertise, that you refrain from providing advice on a topic using a tone that sounds as if you have some authority.
Sorry if this sounds harsh, it is not meant to be. I just have a strong belief in the value of real information.
not sure what you mean by "managing manager"??? With the LLC there can be Member, Managing Member and Manager (I have not seen term Managing Manager). When someone is named as a Manager that in itself assumes that the person is managing the affairs of the LLC. Not so with the member, member can be managing or non-managing (which is the case in IRA LLC).
We are going back and forth with you on this, you keep saying things that don't make sense!
Rental Property Investor · Fort Lauderdale, FL · Member since 2015 · 65 posts · 15 votes
9y
@Brian Eastman@Dmitriy Fomichenko Sorry for the confusion! Everyone should obviously do their own homework on the subject. I'm admittedly not an expert in this field, but I have done a fair amount of research.
I'm sorry but your comments just prove what Brian said earlier: you have very limited knowledge on the subject matter and should refrain from providing advice on this topic.
"Managing Manager" and "Manager-Managed LLC structure" are not the same... I now see what you were trying to say, but you are confusing people by not using the right terminology. That is exactly what I was talking about in all of my previous comments, in the case of IRA LLC the structure for the LLC that it is manager-managed, not member-managed, and the manager of the LLC is IRA account holder, not anybody else (i.e. sibling, etc).
Checkbook IRA is niche that only few experts understand and Nolo is certainly NOT a resource to use to consult on this subject.