Self directed 401K or IRA

[Hunter Eidmann]

I have heard that it's possible to set up a self directed 401K or IRA that you can use to invest in your own real estate tax free. I am wondering if anyone has done this? It seems too good to be true. Each week I set aside $175 for real estate. Can I really pull that money (plus the additional tax that I would no longer be losing) and put it into one of these self directed accounts and then use all that money on my real estate deal? I am from Akron Ohio if that makes an differentce. Thanks for the help!

[Bernard Reisz]

@David J Lepard @Hunter Eidmann

Hopefully, you've identified the best route for yourselves since these posts went up. If it's still of value, it's worth clarifying some things about QRPs, Solo 401k, and Self-Directed IRAs - as over the last few months I've realized there are a few misconceptions that I repeatedly encounter:

There are 2 groups of tax-sheltered retirement accounts:

1. IRAs - Individual Retirement Arrangements
2. QRPs - Qualified Retirement Plans

Each one of these has multiple sub-categories. For example:

1. IRAs - Traditional IRA, Roth IRA, SEP-IRA, SIMPLE-IRA
2. QRPs - 401k plans, profit sharing plans, defined benefit plans, etc.

For real estate investing, the optimal plan type is a QRP that is intended for an "owner-only business." Such plans are referred to by many names, including: QRPs, Solo 401k, Checkbook 401k, etc. None of these are terms that you'll find in the tax code, rather they are "marketing terms." They attempt to convey to the user what the nature of the QRP plan design is, so that consumers understand what they're getting and how to maintain a plan compliantly and not get in trouble with the IRS. 

For example "Solo 401k" conveys that the type of QRP being established is a "401k plan" that is is for Solopreneurs. The terminology used attempts to convey key info, namely the requirements for having such a plan:

• You need to own business
• That business should not have employees other than yourself

Other terms are less informative. For example, the term QRP is the broadest terminology possible; it's just a catch-all for a large group of retirement plans. Before getting a QRP, you should make sure to get very specific information to ensure that it's well-matched to your financial and tax profile. What type of plan is it? Do you qualify for it? Is it just a Solo 401k by another name?

All QRPs must be tied to a business (unlike IRAs) and that's were I'm encountering the greatest pitfalls. People getting QRPs without having a business that would qualify them for such structures.