All Forum Posts by: Brian Eastman

@John Doyle 

No.

Passive income is taxed at a lower rate.

It does not qualify for use making 401k or SEP IRA contributions, nor would it make sense to change it from passive income to higher taxed earned income that would qualify to be used as plan contributions.

@William Hochstedler 

A self directed IRA or 401k can lend to 3rd parties on a secured or unsecured basis. This is very common.

• The note may not be issued to a disqualified party to the IRA.
• The note must conform to the usury laws of the state.

The mechanics of the note transaction will vary based on the type of IRA/401k plan, but in all cases, the plan will be the lender on the note.

• With a custodian, the lender would be XYZ Trust Co FBO: Your Name IRA
• With an IRA LLC, the custodial IRA owns an LLC using the above titling, the loan would be issued from the LLC to the borrower. You would serve as the manager of the transaction and be able to execute the transaction without going through the custodian.
• With a Solo 401k, the plan is a trust, and that trust would be the lender on title to the note.  You would be the trustee and direct the plan investments without 3rd party involvement.

Hope that helps.

@Willie Kate 

There are two basic types of self directed retirement plans. IRA based programs are pretty widely available. The Solo 401k is designed for people who are self-employed and have no full time employees other than potentially their spouse. Both programs would allow you to diversify your retirement plan investing into real estate. The key principal to keep in mind is that the tax-sheltered retirement funds are not for your benefit at the current time, and you need to keep all your investing very separate from personal affairs and at arm's length.

The Solo 401k has a few distinct advantages over the IRA, assuming you qualify. If you have active self employment (not passive investment holdings) that produce significant income, you can defer significant amounts into the 401k and both reduce your tax profile while building up that nest egg. A 401k is also superior to an IRA based program if you are looking at using leverage, as it is not subject to UDFI taxation on income generated from borrowed funds. Lastly, if you are investing in California, the 401k platform does not require an LLC in order to provide you with checkbook control, while an IRA will.

There is great potential for retirement wealth building with these plans.  There is also a lot of good information and some good resources here on BP on the topic.  Read up a little than touch base with a few of the professionals who offer such services, as well as your tax advisor.

Best of luck as you start putting planning into action!

@Matt Fisher 

Unfortunately, your attorney's reaction is not uncommon, and is based entirely on his lack of familiarity with this field.

Yes, there are specific restrictions that come with using tax sheltered retirement funds to invest in real estate. Everything must be kept at arm's length and you may not benefit in any personal way until such time as you start taking distributions from the IRA or 401k in retirement.

If you utilize your Solo 401k in a manner where you think of yourself as a fund manager deploying the capital to it's highest and best use, and not as "joe landlord" using the retirement capital to fund "your" real estate deals, then you will be just fine.

Such a plan provides the opportunity to put that retirement capital to work in real estate, invest in what you know, and hopefully achieve better results with that retirement savings than if you left if in the good hands of the folks on Wall Street.

Take the time to research and learn about the process of using a self directed IRA or 401k. Speak with some of the folk in the industry who participate here at BP. Find an attorney or CPA locally who is at least somewhat familiar with the process. You might find there is tremendous opportunity.

@Graeme Black 

It very much sounds like the Solo 401k is not going to be a solution.  Converting passive income taxed at a low rate into higher rate earned income, for the purposes of deferring that income into a retirement plan is, simply put, bad math.

A Solo 401k (if you qualify) or a self directed IRA would be a good means for you to diversify your investments into real estate, but the contribution side looks to be out of reach.

Please consult with your tax advisor to run the numbers.

@Rob K. 

@Derek Lacy summed up the situation nicely with regards to how the policy should be implemented when using an IRA held with a self directed custodian.

I wanted to speak to the topic of your liability exposure personally. An IRA is reasonably well shielded from liability originating from you such as bankruptcy or a judgment in a lawsuit. The reverse is not true.

If someone were to sue the IRA and insurance coverage and/or the assets of the IRA were not sufficient to satisfy a judgment, then you can be held personally liable. The IRA does not shield you in any way.

The use of the IRA LLC format remedies this issue. The LLC holds title to the property and carries both a commercial property and liability policy. If someone sues the LLC, the liability of the owner - which is the IRA - is limited. You are also personally shielded by the limited liability protections of the LLC.

@Jeff G. 

Another consideration is that many on Wall Street are seeing the current REIT market as somewhat overvalued. Due to the overall economic instability of the last several years and the flight of capital out of equities and bonds, there have been few "real asset" or "safe haven" asset options. REITs have been a favored investment class for this reason, and have experienced the same kind of inflation we have seen in stocks - not so much a result of value, but due to demand since there are few alternatives.

I came across the following article lately that I think sheds light on this concept:

http://www.reuters.com/article/2015/02/05/us-usa-property-reits-analysis-idUSKBN0L927G20150205

The other point I would make is that, in an IRA at least, one can leverage when making direct real estate investing but not when purchasing shares of a REIT. And while you might be able to purchase shares of a REIT using margin in a non-qualified account, that's a pretty risky proposition. The ability to get a leveraged rate of return could provide a higher ROI in direct investments.

@Account Closed 

There is nothing incorrect with your logic, however....

If you can generate better returns for your IRA than you can with other options available to your IRA such as the stock market, then you have achieved your goal. It does not matter that the tax benefits of the IRA are different than the tax benefits of investing with non-qualified funds. That is going to be the case regardless of how you invest with an IRA.

IRA investing is very different from after tax investing. But, investing in what you know and generating better returns with a safer underlying asset is definitely a good reason to consider holding rentals, being a hard money lender or even flipping houses within an IRA or Solo 401k.

@Kevin Parnella 

If you are changing jobs, you will have the option to rollover your current 401k either to a new employer 401k or an IRA in your own name.

If you roll to a 401k, you can borrow from the plan as you note. Anything you do with the funds will be as if you did so with cash out of your own pocket, and will be taxed accordingly.  There are no penalties for taking the 401k loan, but you will not only pay back the loan with interest, you will also be replacing the pre-tax dollars you borrowed from the plan with post-tax dollars out of your pocket.  Thus the interest rate is essentially your tax rate + the 4-6% most 401k loans cost.

A self directed IRA is absolutely a viable option. These programs have been around just as long as "regular" IRA's - i.e. what Wall Street wants you to think is the only type of IRA. The tax rules have always allowed for alternative assets such as real estate, stock of privately held companies, etc.

With a self directed IRA, it is not "you investing in real estate with IRA money", but rather "a different way of investing your tax-sheltered retirement plan". All investments must be entirely at arm's length with the only purpose of growing your retirement savings. You cannot utilize the proceeds (or the plan held properties) personally, nor can you "add value" to the IRA through the provision of goods or services (i.e. sweat equity). You essentially get to be your own fund manager.

It is a very different game with different outcomes, but can be a fantastic way to build wealth for your retirement future.

There is a lot of info here on BP on the topic to get you started. The best way to learn what your options are is to speak with one or more of the self directed IRA specialist who participate here at BP.

@Mimi H. 

Rental income is not useful for sponsoring a Solo 401k.  This is passive investment earnings, not earned income taxed at your regular rate.  You are much better off leaving the rental income as-is than trying to re-configure your business to claim that income at a higher tax rate so that you can then set it aside into your retirement plan.