Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
Here's a thought in SDIRA versus loaning to oneself from the 401k.
SDIRA as we know comes with all sorts of fees.
401k can be used to loan money out to the holder of the account.
I always thought that to be a bad idea but anyway....When the money is paid back, it's with interest (I'm told) to the account holder.
So, the 401k has no fees when using it as allowed to withdraw from. The money would be used to either fund a flip, thereby, paying the 401k back after selling. Or, down payment or rehab and again paying back afterward.
Can the 401k be used to avoid the fees that come with SDIRA accounts?
I'm sure there are strong reasons for withdrawal from the 401k.
If your whole thrust is to avoid fees, you may want to rethink being in REI. Consumers avoid fees. Business people view fees as the cost of doing business and look for ways to deduct them from their taxable income.
That said, of course, remember that with a self directed account the entire value can be used, while 401(k) loans are limited to 50% of your vested balance up to $50K.
401(k) withdrawals would be subject to the usual rules about the age of the account holder regarding penalties and 20% tax withholding.
If your whole thrust is to avoid fees, you may want to rethink being in REI. Consumers avoid fees. Business people view fees as the cost of doing business and look for ways to deduct them from their taxable income.
That said, of course, remember that with a self directed account the entire value can be used, while 401(k) loans are limited to 50% of your vested balance up to $50K.
401(k) withdrawals would be subject to the usual rules about the age of the account holder regarding penalties and 20% tax withholding.
I would agree that the minimal fees associated with a self-directed retirement plan are a non-issue relative to your question.
The key question is where is the growth happening and what are the tax implications?
When you borrow from your 401k (for which there may be fees), you are locking the 401k into a low rate of return. The money is now YOUR money to invest in something like real estate. You will pay taxes on the income produced by the investment.
A Solo 401k or self-directed IRA can invest directly into real estate, but that is an entirely different concept. The only goal is better security of principal and ROI for the retirement plan. The plan owns the real estate and the income from the investments is tax-sheltered back into the retirement plan. If you are making any investment worth doing, the fees are a complete non-factor - though of course they do vary based on the plan type, provider, etc.
A lot of folks posting on BP want to think of a SDIRA as money THEY are investing in real estate, and it really is not. YOU are essentially fund-managing your own IRA or 401k into real estate investments. Understanding that key difference is key to getting great results for your retirement savings with a self-directed plan.
@Brian Eastman Thanks for the sounding board. No particular reason other than a thought that crossed my mind today on the many facets of financing investment and why people choose one over the other.
@David Dachtera My post was not to say I was looking to avoid fees. On the contrary it was more to the point of choosing one over the other and why.
Not everyone qualifies for or will benefit from the added features of the Solo 401k plan. In that case, the self-directed IRA LLC is an equivalent program providing full control over investments and the ability to invest in anything the IRS rules allow.
Generally speaking, when someone is self-employed and has no full time employees, and looks to be in that situation for some time, then the Solo 401(k) will be the better option.