Rental Property Investor · Loveland, CO · Member since 2018 · 24 posts · 1 vote
I'm kicking around the idea of moving 401k funds out of the stock market and into real estate investments. I started researching self directed IRA because a lot of people seem to use that on here but I stumbled across a Solo 401k vs self directed IRA comparison and there were some compelling differences in favor of Solo 401k. Does anyone have any opinion on which one is better and why?
If one qualifies by being self-employed with no full time employees, then the Solo 401(k) is likely going to provide some advantages over an IRA as a 401k is simply a more robust retirement plan with features such as higher contributions, a personal loan provision, ability to hold both tax-deferred and Roth funds, and an exemption from a small tax on leveraged income in real estate.
Whether you A) qualify and B) will benefit from those differences is a matter that hinges on the details of your situation and investment goals. A conversation with a professional or two in the field will be the best way to get to the heart of that question.
Either way, both plans are great vehicles for taking control of your tax-sheltered retirement savings and investing in real estate and other secure assets.
If one qualifies by being self-employed with no full time employees, then the Solo 401(k) is likely going to provide some advantages over an IRA as a 401k is simply a more robust retirement plan with features such as higher contributions, a personal loan provision, ability to hold both tax-deferred and Roth funds, and an exemption from a small tax on leveraged income in real estate.
Whether you A) qualify and B) will benefit from those differences is a matter that hinges on the details of your situation and investment goals. A conversation with a professional or two in the field will be the best way to get to the heart of that question.
Either way, both plans are great vehicles for taking control of your tax-sheltered retirement savings and investing in real estate and other secure assets.
When you do size by side comparison of the two it is obvious that Solo 401k comes way ahead. Will you benefit from all of the advantages it has to offer? That depends on your personal situation as Brian elaborated above. Most people will select Solo K if they are eligible, the only reason I can think of why you'd go an IRA route is if you had Roth IRA to rollover into self-directed. IRS rules don't allow Roth IRA -> 401k rollover so you'll have to stick with SD Roth IRA.
Here is a related discussion you may find helpful:
In order to qualify for a Solo 401(k), you need to be self-employed and have no full time employees. Pretty basic.
While there are some out there who promote "anyone can qualify, just drive for UBER", we urge caution. If you are self-employed for real, great. "Creating" self employment just to have the SoloK vs an IRA is generally not beneficial.
Developer · . · Member since 2014 · 520 posts · 162 votes
7y
I know someone who is self employed and doing well while also maintaining a W2. They are in their 60s and nearing retirement from the W2. Does the SIDRA or SoloK make sense. Can they roll funds in to the SoloK from another fund? Are there required minimum distribution rules?
It sounds as if this person would be eligible for a Solo 401(k). Whether it would be the better plan for them or not over the long term would be something to discuss.
Since they are over age 59 1/2, they should be able to move any tax-deferred IRA or 401(k) type savings into such a plan via rollover, including from their current employer plan. Someone under age 59 might not be able to do the current employer plan. They could also move Roth funds held in a 401(k), but not an existing Roth IRA into a Solo 401(k).
Either an IRA or Solo 401(k) will be subject to standard required minimum distribution rules starting at age 70 1/2. That is usually pretty easy to manage, and simply requires some planning to maintain the necessary liquidity to make distributions from. Good cash flowing real estate or note investments will easily meet most individual's RMD needs without needing to start selling off plan assets until about 85 years old.
Rental Property Investor · Loveland, CO · Member since 2018 · 24 posts · 1 vote
7y
Wow, that's too bad. The Solo 401k is so much better than SDIRA for what I'm wanting to do. Self-employed with no employees!? Not many people are going to qualify for it right?
Certainly a good number of people qualify; think real estate agents, independent contractors, etc. About 30% of our client base is using the Solo 401(k) and the rest are quite happy with an IRA based program.
What has you thinking the Solo 401(k) is "so much better"? Often the differences between the Solo 401(k) and a checkbook IRA are pretty incremental.
Rental Property Investor · Loveland, CO · Member since 2018 · 24 posts · 1 vote
7y
I'm looking into this as an option to buy a STR property. From what I understand, income is taxed at a high rate for SDIRA vs low or no tax for the solo 401k. Also, it sounds like the solo 401k is more lenient when it comes to your fund being disqualified from breaking a rule.
There is no difference in taxation between an IRA and Solo 401(K) on trade or business income generated from a short term rental. Such activities have the potential to create Unrelated Business Taxable Income and both plans are subject to that tax.
The only tax difference on the Solo 401(k) is on Unrelated Debt Financed Income that occurs when leverage is used, and then only for real estate debit (not other forms of leverage). The impact of UDFI in an IRA is typically nominal, so while a 401(k) is better through avoiding that tax, it is not generally a huge differential that would encourage one only eligible for an IRA to run away from a leveraged transaction.
When you read on the internet that a Solo 401(k) is exempt from UBIT, that is a broad statement that mis-characterizes the real difference.
Trade or business income generates UBTI (Unrelated Business Taxable Income). IRA and 401k are subject to this tax.
Leverage generated UDFI (Unrelated Debt Financed Income). 401k exempted when debt is secured by real property.
The tax paid when either of the above types of taxable income are created is UBIT (Unrealated Business Income Tax). A lot of people just toss around the term UBIT to cover the whole concept, which is an over-generalization.
I generally agree with the common recommendation to setup a Solo 401k if you are eligible. If you're not eligible and don't have an easy path to becoming legitimately eligible for the foreseeable future (not just temporarily) however, the self-directed IRA is the way to go. If you focus on finding the best investments for the account as well as understanding and following the rules, that is much more important and beneficial than the specifics of the account type you're using.