Which would be better: a self-directed IRA, or solo 401k? Suggested company to use?

Question

So, in my quest to find PML, I was thinking about, initially, SDIRAs. It was during the time of doing research, that I came across solo 401k s, initially here on BP.

What I plan to do, is put on workshops in my community, to get PML. However, I'm not sure which would work better, between SDIRA or S-401k, nor what company to use for this.

My goal would be to mainly use these to help fund fix & flips.

Since most individuals wouldn't have enough in their own account, would it be possible to use multiple SDIRA/S401ks, for commercial/mfh, or no?

Aaron Montague · Answer

Calling @Dmitriy Fomichenko

Dmitriy Fomichenko · Answer

@Eddie Starr , I see that you are repetitively new to the community, so welcome to BiggerPockets!

I agree with the comments above that it is possible to use funds from multiple investors retirement accounts.  One investor could hold 1st trust deed and other could do the 2nd trust deed.  There are also other ways to structure the deal.

I would also like to echo @Amanda Han that having a tax expert in your corner is very important, be sure to understand tax implications before doing anything.

Just like self-directed IRA, truly self directed Solo 401k allows you to invest in alternative assets, but it also offers some unique features that are not available with SD IRA, which make this plan superior to SD IRA. Take a look at few:

• Solo 401k offers Participant Loan Feature which allows you to access your retirement funds any time for any reason (example would be investing in a transactions that would be otherwise prohibited). It's like creating your own bank that will never turn you down. Some may never use this feature, but it is sure great to have this option. With an IRA you can'??t touch your money until you are over 59 1/2 and if you do - you are taxed and penalized heavily!
• Roth Solo 401(k) - you can maintain additional, separate 'bucket' under your Solo 401(k) plan where you could make after tax contributions, thus, investing tax free for the rest of your life. The limit on Roth contribution in Solo 401k is up to $23,000 (compared to $6,500 in Roth IRA) and there is no income restriction on contributions unlike with Roth IRA. Also, pre-tax portion could be converted into after-tax (Roth). (Tax professional should be consulted prior doing so).
• With Solo 401(k) custodian is not required. The plan can be self-administered which could mean significant savings $$ on custodian, transactions and asset based fees that would be there in a case of a SD IRA. You also have a checkbook control and dont have to obtain custodian consent when making investments. This could be huge on time-sensitive investments and give great level of convenience.
• Large contribution limit of up to $57,000 (significantly higher than an IRA, which is only $6,500). In additional to all other benefits mentioned above, Solo 401k is a great tax-sheltering vehicle, allowing you to shelter huge amount of money from taxes.
• When you use financing to acquire real estate in a SD IRA, the portion of the income from the property will be subject to UDFI tax (type of the UBIT of about 35%)! When you finance real estate inside of Solo 401k - it would be exempt from UDFI, which makes it even more attractive to use for real estate investment with leverage.

Solo 401k subject has been discussed here on BP in details many times and you can find a lot more info and learn about the experience of those who used it.

You are in the right place, keep learning and don't hesitate to ask for help. There is a lot of helpful people here on BP who are willing to share their experience and offer assistance.

Amanda Han · Answer

Yes you can use funds from multiple people to fund your deals if they are all going to be passive investors. One thing to look out for if you are flipping is that there may potentially be UBIT taxes if it is considered an active business. There could be ways around that so be sure to speak with your tax advisor (or have your investors speak with their tax advisors) before pulling the trigger. I also agree with the comment above on uDirect IRA Services....they have been wonderful to work.

Jared Lopez · Answer

It is fine to receive private money from an individuals self-directed retirement plan and taking multiple investors is fine as well. There are certain rules and restrictions you should be aware of.

While I can't provide investment advice, if you give me a call or PM me, we can discuss the IRS rules.

Zaid R. · Answer

Check out "uDirect IRA", while I haven't used them myself I've heard a lot of positive things from my friends who do use them. (For the record I'm not affliated and do not benefit from this :)

It might be worth checking out their website and calling them up to ask about this

Which would be better: a self-directed IRA, or solo 401k? Suggested company to use?

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