Self Directed 401k... which financial institutions?

Question

I’m trying to get my self directed 401k set up so I can borrow money without penalty to buy real estate. I’m having trouble finding a financial institution that will set one up. At the lager institutions like Schwabb and Fidelity most of their staff had never heard of it and don’t offer it. Any ideas? Does anyone have an
SD40k? Thanks

George Blower · Answer

@Mary Arobaga-Reardon @Jacqueline Gardiner Thanks for the positive feedbackHere are the general considerations regarding 401k loans. 401k Participant Loans If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply). Please keep in mind the multiple loan rules:Under those rules, the sum of the balances of a participant's outstanding 401k loans under a single 401k plan (using the highest outstanding balance of each loan over the last 12 months) can't exceed 50% or $50,000 whichever is less. Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.

Dmitriy Fomichenko · Answer

@Mary Arobaga-ReardonSelf-directed Solo 401k is a topic that comes up in the discussion here on the forum quite often. I recommend you check out this thread which you can learn a lot from: https://www.biggerpockets.com/forums/51/topics/527877-self-directed-solo-401k-for-real-estate-investors-q-and-a

Carl Fischer · Answer

@Mary Arobaga-Reardon - You got a very good answer from @Brian Eastman. If you want to purchase income-producing real estate, I would consider doing it in your 401(k) or your IRA. If you're looking to purchase a home, I think you are on the right track with E*Trade for borrowing that money. You also have the capability to possibly borrow up to $100,000 for three years under the CARES Act, so look into that. There are some rules and regulations surrounding that, but so far, I think the government has been very lenient. If you have any additional questions, feel free to connect.

Jacqueline Gardiner · Answer

If you decide that you want a Solo-401K plan that you can use to invest in real estate directly, one option is MySolo401K which you can easily find on the internet. I have had an acct with them for about 3 years which has been mostly a positive experience. I believe the initial cost was $750 to set it up and then $125/year.

Mary Arobaga-Reardon · Answer

Fabulous. That was quick. Thanks Brian. I’ve already contacted ETrade.

Brian Eastman · Answer

@Mary Arobaga-ReardonIf your only goal is to borrow from the Solo 401(k), then you do not need to take on the complexity of administering of a fully self-directed 401(k) plan.Try E*Trade or UBS. They offer basic stock market only Solo 401(k) plans and support the participant loan feature.Once you start talking real estate to a mainstream brokerage house, you will be outside their knowledge or ability to assist you. In your outlined statement of intent, the plan is not investing in real estate. You are taking a loan personally from your plan, and then you are investing in real estate.Truly self-directed IRA and Solo 401(k) plans are offered by specialty providers who can create a custom 401(k) for your business that is capable of investing in anything the IRS rules allow for - which includes a lot more that just stocks, such as real estate, private mortgage notes, cryptocurrencies, precious metals, venture capital ... You would only need such a plan if you wanted the plan to directly invest in something like real estate. In that case, the 401(k) would own the property, pay for all expenses, and receive all income in a tax-sheltered manner. You cannot personally benefit, however. This is just a way to diversify your retirement savings.