Rollover 401K to a Self-Directed IRA for property purchase

[Josef Super]

Hello BP community! I have recently switched jobs and have accumulated $88K in my 401K. I am looking to invest these funds in real estate instead of keeping it in mutual funds, bonds, etc. My plan is to roll it over into a Self-Directed IRA with a checkbook capabilities. SDIRA would then allow me to purchase an investment property, which I would be able to rent out. Implications with purchasing a rental property within SDIRA is that I will need to follow IRS imposed SDIRA rules such as no self-dealing, running an active business, and not providing a service to the property. As a workaround, my plan is to have my friend manage my property for me and compensate him based on the amount of work he needs to do on the property. Another potential challenge is the difficulty of obtaining a non-recourse loan that would require me to put down ~40% on the property at a potentially high interest rate. A workaround I am exploring is to create an SDIRA LLC and partner up with my friend who also has funds in a 401K from previous employer. This way my partner and I would be able to combine our funds and buy a property without a need for a non-recourse loan also allowing us to avoid paying Unrelated Business Income Tax (UBIT).

Here are some of the questions I have:

• Suggestions for a reliable custodian to insure I don’t violate any of the IRS transaction rules and also charges low fees.
• Does the custodian setup a SDIRA LLC or will I need to have a lawyer set this up?
• Advantages and disadvantages of purchasing notes instead of property within a Self-Directed IRA.
• Overall comments or deficiencies in the plan I have outlined above?

My overall goal with setting up a SDIRA is to identify and utilize a best option for the highest returns for my retirement account. I am currently 30 years old.

Thanks in advance,

-Joe  

[Dmitriy Fomichenko]

Josef, there are certainly some custodians that are better than others. That is where your due diligence comes in. 

If you are eligible for a truly self-directed Solo 401k plan there are no questions that it is way superior to a self-directed IRA. You are correct, Solo 401k plan comes with the participant loan feature allowing you to access your retirement funds tax/penalties free before retirement. Also they are exempt from UBIT on leveraged real estate and allow you to invest tax-free using Roth sub-account.