401k Alternative

[Michael Bickel]

I currently have just under $10k in 401k funds available. I've heard of self-directed IRA's being used for real estate, and I'd like to potentially look into utilizing one now or in the future, or some other type of vehicle that allows me to use my funds in a similar fashion. Is there a limit to how much is required to rollover, or can I just rollover whatever I have? Are there other vehicles that are similar or more suitable for the smaller amount? I know there are self-dealing rules and guidelines that need to be adhered to; what are some of the other big considerations that I should be looking into? Do I need to be a certain age to do a rollover from a 401k (still employed by the company who this 401k is held with) to a SD-IRA?

[Sheila F.]

Hi Michael,

Just wanted to add my limited knowledge on this subject. LOL  I got this advice at a Tony Robbins event and have heard this from Tony Robbins in his book "Money".  Basically, the secret of the giants in investing is 2 fold.  Leverage and compounding.  I have been tempted to pull out my 401K and put it all in real estate, but 2008 can happen again.  My money in real estate is growing so much faster than my 401K, but the last I heard, crashes do not send out an e mail that they are on their way!!!  My advice, do what you're doing, check it out, and remember, it's you that will reap the benefits or suffer the consequences.  I hope this helps!  Best of luck to you!

Sheila

[Tom S.]

@Michael Bickel

Looks like there's a current discussion that could answer your question:

- Tom

https://www.biggerpockets.com/forums/50/topics/310...

[Michael Bickel]

Sheila,

I appreciate your advice. No, you can't predict the next crash, but that crash affects the stock market as well. Also, with real estate, these market fluctuations aren't nearly as volatile as the stock market. So yes I do agree that it is good to diversify, and I have a separate investment fund for stocks; but with real estate, the market has much more stability than the stock market and so things don't just turn over night. So all you can do is pay attention, look for the signs, an evaluate the situation, just like with any investment. Also, from my understanding, a SD-IRA can be used for much more than just real estate, it just provides its owner with more control over exactly where the funds are allocated. Definitely though, ultimately I will reap the benefits or suffer the consequences, so I just have to do my due diligence! Thank you again for your insight!

Tom, thanks for the reference, I will have to check it out and see what I can find!

[Dmitriy Fomichenko]

@Michael Bickel There is no minimum amount or age requirement to rollover from a 401k to an IRA. However, if you are still working with the employer that sets up the 401k, then it may not be possible to transfer the funds out. You will need to check the plan policy or talk to the plan administrator to see if the plan allows "in-service distribution".

[Justin Windham]

@Michael Bickel

In addition to the self directed IRA, you may also want to see if you are eligible for a Solo 401k. The Solo 401k offers a lot of benefits over an IRA if you have earned income from self employment and no employees of your own.

Otherwise, the self directed IRA can be a great investment tool.

[Mark Nolan]

@Michael Bickel

Here is some information regarding the solo 401k and the self-directed IRA:

e Self-Directed IRA and Solo 401k Similarities

• Both were created by congress for individuals to save for retirement;
• Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
• Both allow for Roth contributions;
• Both are subject to prohibited transaction rules;
• Both are subject to federal taxes at time of distribution;
• Both allow for checkbook control for placing alternative investments;
• Both may be invested in annuities;
• Both are protected from creditors;
• Both allow for nondeductible contributions;
• Both are prohibited from investing in assets listed under I.R.C. 408(m); and

The Self-Directed IRA and Solo 401k Differences

• In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
• To open a self-directed IRA, self-employment income is not required;
• In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) is used;
• The solo 401k allows for checkbook control from the onset;
• The solo 401k allows for personal loan known as a solo 401k loan;
• It is prohibited to borrow from your IRA;
• The Solo 401k may be invested in life insurance;
• The self-directed IRA may not be invested in life insurance;
• The solo 401k allow for high contribution amounts (for 2015; the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
• The solo 401k business owner can serve as trustee of the solo 401k;
• The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
• When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
• Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
• When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
• Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
• Pre-tax IRA contributions on reported on line 32 of Form 1040;
• Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
• Roth solo 401k funds are subject to RMDs;
• A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
• Roth IRA funds are not subject to requirement minimum distributions (RMDs);
• The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
• The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
• At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
• At termination, the self-directed IRA is only required to file a form 1099-R.

[Mark Shafer]

Great information, who or how do I talk to to setup a solo 401k? Do I put the property in the solo 401k?

[Mark Shafer]

Can you get a bank loan in the solo 401k to purchase houses? Or do you need enough to buy house out right?

[Brian Eastman]

@Mark Shafer

There are several providers of Solo 401k plans in this thread already.  Do your research as there are differences in the level of support for your plan you can expect from various providers.

A Solo 401k may use a mortgage, but with less than $10K that is not something that will be available to you from commercial lenders.  You would need to seek owner financing or private lenders.  Any mortgage for the 401k must be non-recourse - meaning no personal guarantee from you.

When a Solo 401k (or IRA) is used to invest in property, the plan is the investor. Title is in the name of the plan (i.e. Shafer 401k plan). All expenses come from plan funds and all income is returned to the plan.

[Mark Nolan]

@Mark Shafer

If you are self-employed you can generally open a solo 401k plan. See following IRS link.

https://www.irs.gov/retirement-plans/one-participant-401-k-plans