All Forum Posts by: Jeff Barnes

Your 401k will be subject to UBIT, if that is what you are asking. Since LLCs are active, pass-through entities, your 401k would be liable for the tax on the company. This is the main reason why you would have the UBIT assessed.

If however the company was a C-corp, then the company would pay taxes, and thus your 401k would not be subject to UBIT.

We generally advise clients not to invest in LLCs with their 401k or IRA for this reason because the IRS could easily "interpret" the UBTI rules negatively against you since the LLC is an active business (which is unrelated to the passive investment purpose of the 401k or IRA).

A better solution is to have the 401k Trust purchase the property (if that's what you're doing) and get financing for it. Unlike an IRA LLC, this will not trigger Unrelated Debt Financed Income (UDFI) or UBIT.

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Bylaws are required for the company adopting the 401k, which is required if you want to make distributions from the employer. The other requirement is to have an actual "Defined Contribution Trust" which is needed in order to establish the actual trust so that you can have the 401k. Trust documents must also include an adoption agreement stating that the company adopted the 401k plan and trust, which names the owner as the trustee of the trust, thereby giving them rights and privileges to deposit, withdraw, and transfer money within the trust's accounts.

The trust and plans we set up for investors are about 300 pages long, so there is ample documentation required to make it a truly self-directed account with checkbook control.

I wonder if everyone here is completely aware of the rules surrounding IRA LLCs? It seems as though people are really just trying to avoid using a self-directed IRA the way they are designed...with a custodian. I strongly encourage people to think twice, make that five times, before setting up an IRA LLC!

Please read the following articles by a trusted advisor and attorney on these entities and understand there are serious implications for using these setups incorrectly (such as a 39.6% tax rate!).

http://bit.ly/1qHlQs3

http://bit.ly/1ga9uDV or http://1.usa.gov/1syFp17 (for the actual court case)

I would highly recommend the use of a self-directed 401k as a trustee since there is much more precedence around these types of plans, as well as regulation in place.

Of course you can do anything you want...until you get caught! I personally do not want to be caught up in anything with the SEC or IRS personally, which is why I steer clear of IRA LLCs and advise clients to do the same.

I'd like to add a couple of things here:

1. Any loan you take out against your 401k is not deductible since the interest repayment is generally to your own account.

2. Maximize your 401k contributions the best you can at this point. If you ever quit your job, you can roll over 100% of the vested amount into a new 401k plan that you set up for your own company (a self directed 401k). If set up correctly, you can invest 100% of the money in your 401k into your real estate deals. If you convert to an IRA before you are 59 1/2, you will have to pay taxes and early withdrawal fees, so rolling over to a self directed 401k is probably the best solution, so you will want as much in there as you can for starting your business/investing career.

Good luck!

@Frank Fiore Jr ,

Lots to talk about here!

First off, where did you hear that you could be a partner in your LLC with your IRA and get paid? I would tread very lightly here, as that is going to be considered self-dealing by almost any IRS agent! But let me back up.

1. A self directed IRA is the exact same as an IRA by any other name. The only difference is whether the custodian you have your IRA with will allow you to "self direct" into assets that they are not managers of. Most companies on Wall Street will only allow you to invest in their assets, hence it is not a truly "self directed" IRA. You can open up the IRA at any firm, and then roll it over into another Self Directed IRA if you so choose at a later date.

1a. Up to you. You can only put in up to $6500 in an IRA, regardless of the type each year (IRS IRA Limits). If you want to hold off until you have a large sum to invest, that is your prerogative, but by no means required. If you already have an IRA, you can roll it over into an SDIRA, regardless of the amount you want to roll over.

2. An IRA LLC is just a fancy way of saying "My IRA owns a company; an LLC". So, just like you can invest your IRA in a Public company, so too can you invest it in an LLC that is private. Your IRA can own membership units (similar to shares) of an LLC with other IRAs, or other owners, but generally not with you directly. This is known as "self dealing" and could completely wipe out your IRA and cause you to pay hefty fines and taxes. To paraphrase: "SELF-DEALING, OR ENGAGING IN A PROHIBITED TRANSACTION, can taint any IRA transaction. Transactions must be made at arm

Alex Craig- you can't continue to contribute to a SD 401k since you have full time employees (full time being the keyword there). However, if you have a business that you can get modest income from by means of a shell organization or even a small management company, then you can set up a SD 401k and roll your funds into that, and use those funds for investing purposes.

The process of rolling over your 401k is rather simple and painless, assuming you have a good company working with you.

Ann Bellamy- take a look at the IRS' website at http://www.irs.gov/pub/irs-tege/rollover_chart.pdf to see exactly what type of rollovers are allowed. A 401k is considered a "Qualified Plan" in this chart.

The one big area that the IRS didn't allow, and don't ask me why, is the ability to roll a Roth IRA into a Roth 401k. They are both after-tax contributions, but for some reason they are disallowed.

Ann Bellamy is correct that you need to have income into the LLC in order to contribute to a Solo K. However, just like any other 401k plan, once you have it set up, there is no legal requirement to continue contributing to it. In fact, one of the ways we help folks is to set up their Solo K simply as a way to roll their old 401k into it, then they use the new Solo K for investing in a way that suits them best.

Jack, it sounds like you've done your homework here, and it looks like a pretty complex setup straight out of the gate. I'm assuming you have setup and/or run businesses before, otherwise it's unlikely you'd want to jump through all the these hoops just to get started.

My first suggestion is to keep it simple in the beginning, then use your profits to get CPA's and attorneys to get everything set up for you in a manner conducive to your goals.

That being said, since I'm neither a CPA or attorney, I can't say for sure what you plan to do is legal, helpful, or worth the headache. What I can tell you is that you will need to check with each and every state you try to do business in and make sure you register your business accordingly. I use a Delaware setup for asset protection and anonymity, but still have to register in each state where we do business, but a lot of that has to do with getting proper licenses and permits, and we raise money in several states, so that is an additional requirement.

Best advice I've ever been given is to come up with a plan, draw up any documents you want, then go to an attorney for review. That way the costs are lower (theoretically) since you have already done a lot of the work, and you can determine if the attorney is right for you. If the attorney says "That won't work" instead of "Here's a better idea/suggestion" then it is a good indication they aren't going to be your best ally.