How to handle the tax forms from the property manager and the bank?

[Zehua Zhou]

I just set up my solo 401k under uDirectIRA, and the LLC that will be 100% owned by the 401k, and ready to buy real estate using the LLC.

My question is regarding taxation. 

Should I give my LLC's EIN number or my 401k custodian's EIN number to the property manager? They will still issue me 1099-MISC forms. That form clearly shouldn't be issued against my own SSN. uDirectIRA sent me an instruction to use their trust company's EIN and address. I wonder if the tax forms would be mailed there, and then that trust company will file to IRS to explain it is tax exempt? Or will it be issued against my 401k's EIN and I'll just ignore these forms?

Same question for the Bank account, as the bank needs to issue the 1099-INT form. 

I talked to a business attorney and she said she wasn't sure how taxation works here and wants me to do thorough research.

[Dmitriy Fomichenko]

@Zehua Zhou, 

You have a flawed setup. A 401k does not require a custodian or a third-party administrator (TPA), and you don't need an LLC to have checkbook control for your 401k. You just need the right provider to set it up better. We set Solo 401k plans for our clients in the form of a trust instead of using a custodian. The trust will have its own EIN, and as a trustee, you control it. This way, you will eliminate the custodian completely with its fees, red tape, etc. The end result - are you truly in the driver's seat of your 401k!

As trustee of the plan, you can open a bank account in just a few hours at one of our preferred banks. If you need a brokerage account at Fidelity, you open Fidelity's Investment-Only Non-Prototype Retirement account for the 401k; there is no need for the LLC. Your structure is complex and not cost-effective. Try to always remember and apply the KISS principle (keep it simple).

[Zehua Zhou]

Quote from @Dmitriy Fomichenko:

@Zehua Zhou, 

You have a flawed setup. A 401k does not require a custodian or a third-party administrator (TPA), and you don't need an LLC to have checkbook control for your 401k. You just need the right provider to set it up better. We set Solo 401k plans for our clients in the form of a trust instead of using a custodian. The trust will have its own EIN, and as a trustee, you control it. This way, you will eliminate the custodian completely with its fees, red tape, etc. The end result - are you truly in the driver's seat of your 401k!

As trustee of the plan, you can open a bank account in just a few hours at one of our preferred banks. If you need a brokerage account at Fidelity, you open Fidelity's Investment-Only Non-Prototype Retirement account for the 401k; there is no need for the LLC. Your structure is complex and not cost-effective. Try to always remember and apply the KISS principle (keep it simple).

 Hi Dmitriy,

     Thank you for your suggestion! I am losing trust with uDirectIRA at this point because after I made multiple calls, no one there was able to explain to me how this works end to end. I see you work for senseFinancial. I left a message via the Contact Us form on your website. Can you please give me a call tomorrow to talk more about this?

Yours sincerely,

Zehua

[Zachary Jensen]

Quote from @Dmitriy Fomichenko:

@Zehua Zhou, 

You have a flawed setup. A 401k does not require a custodian or a third-party administrator (TPA), and you don't need an LLC to have checkbook control for your 401k. You just need the right provider to set it up better. We set Solo 401k plans for our clients in the form of a trust instead of using a custodian. The trust will have its own EIN, and as a trustee, you control it. This way, you will eliminate the custodian completely with its fees, red tape, etc. The end result - are you truly in the driver's seat of your 401k!

As trustee of the plan, you can open a bank account in just a few hours at one of our preferred banks. If you need a brokerage account at Fidelity, you open Fidelity's Investment-Only Non-Prototype Retirement account for the 401k; there is no need for the LLC. Your structure is complex and not cost-effective. Try to always remember and apply the KISS principle (keep it simple).

 I also would recommend Fidelity. They are easy to get started with an the support has been OK compared to others 

[Michael Smythe]

@Zehua Zhou usually, your 401k will lend funds to your LLC.

In that case, you would give a PMC the LLC EIN.

You really should get advice from a tax professional.

[Kevin S.]

Quote from @Zachary Jensen:

Quote from @Dmitriy Fomichenko:

@Zehua Zhou, 

You have a flawed setup. A 401k does not require a custodian or a third-party administrator (TPA), and you don't need an LLC to have checkbook control for your 401k. You just need the right provider to set it up better. We set Solo 401k plans for our clients in the form of a trust instead of using a custodian. The trust will have its own EIN, and as a trustee, you control it. This way, you will eliminate the custodian completely with its fees, red tape, etc. The end result - are you truly in the driver's seat of your 401k!

As trustee of the plan, you can open a bank account in just a few hours at one of our preferred banks. If you need a brokerage account at Fidelity, you open Fidelity's Investment-Only Non-Prototype Retirement account for the 401k; there is no need for the LLC. Your structure is complex and not cost-effective. Try to always remember and apply the KISS principle (keep it simple).

 I also would recommend Fidelity. They are easy to get started with an the support has been OK compared to others 

 I am going to jump in here for few questions.

Does it make sense to buy RE in retirement account(401K) as the tax benefit and write off are not similarly applicable as outside of 401K?

What happens to the REI/portfolio when it's time for RMD? Liquidate all properties? What are the tax implications then? How does it pass down to heirs? Thanks in advance.

[Dmitriy Fomichenko]

@Kevin S.

If you are getting an average return of 7% in your 401k and have an option of converting that to self-directed and then invest in real estate and as a result, get 20% return - does it make sense to switch? 

Buying real estate inside a qualified retirement account is not about tax write-offs. You can't do that since you don't own the property; your IRA/401k does. And your IRA/401k is a separate legal entity from you. Compared to the stock market, real estate investing offers better return on investment and lower risk. That is why many invest in RE with their 401Ks.

As far as the RMD is concerned, you have to plan for it. If you have a portfolio of, say, five rentals in your 401k when you are in your sixties that produce $7,000-$10,000/mo in passive income (rental cash flow) - then you simply take the rental income as your RMD without touching the properties. If you don't have enough income to satisfy the RMD, you may have to liquidate the assets or distribute them to yourself as "in-kind distribution". 

[Kevin S.]

@Dmitriy Fomichenko

You are right about 7% return in the 401K and have been considering REI in 401k since joining BP.

I am not sure if RE is at 20% if I start now, with the rental @ 0.5% of RE value, higher down payment and high interest rate.  My current RE returns will be at about 10-11% not including tax write-offs.  Also, looking for answer as to what are the tax implications at RMD stage?  Feel free to respond as a non-tax expert if you want. Thank you, Dmitriy.

[Kevin S.]

@Dmitriy Fomichenko

Never mind about RMD question.  My bad. You answered that.  I'll check out your website later.  The only question remaining is: How will the property pass down to heirs and the tax implications/inheritance tax etc.  Thanks a lot.

[Dmitriy Fomichenko]

@Kevin S.

When you take RMD from an IRA or 401k, you pay ordinary income tax on the distribution amount. If you go with a self-directed Solo 401k plan, you can supercharge its Roth component by investing in illiquid assets such as trust deeds and converting them to Roth at a deep discount. Then, you can grow them tax-free, and distributions will be tax-free. 

[Dmitriy Fomichenko]

@Kevin S.

Technically, it is not the property passed down to the heirs but the 401k that owns the property. Remember, if you decide to invest in a property in your 401k - you don't own the property, 401k does. 

The rules are the same regardless of whether your heirs inherit a conventional IRA with stocks and mutual funds or a self-directed 401k with properties, trust deeds, and any other alternative assets in it.

Consult with your CPA about tax implications for an inherited IRA.

[Dmitriy Fomichenko]

Quote from @Michael Smythe:

@Zehua Zhou usually, your 401k will lend funds to your LLC.

In that case, you would give a PMC the LLC EIN.

You really should get advice from a tax professional.

Michael, what you are proposing is a "prohibited transaction" defined by the IRS. 401k would be prohibited from lending funds to the account owner's LLC. 

[Zehua Zhou]

Quote from @Michael Smythe:

@Zehua Zhou usually, your 401k will lend funds to your LLC.

In that case, you would give a PMC the LLC EIN.

You really should get advice from a tax professional.

My original plan with uDirectIRA is to let my 401k make a private equity investment into my LLC to make it own 100% of my LLC, and let my LLC buy real estate. Since the LLC is a disregarded entity, the income/expense flows to the 401k and will be tax deferred. But again, I run into the above questions when I try to implement details and no one in uDirectIRA would tell me how this works.

[Dmitriy Fomichenko]

@Zehua Zhou, the setup would make sense if it was an IRA. But with the 401k, you don't need a custodian or third-party administrator (TPA). Moreover, you don't need an LLC to get the checkbook control. What you need is a truly self-directed Solo 401k plan!

Once established, you will be designated trustee of the 401k and will have full control over it, without any middleman. Simple, convenient, and cost-efficient! Again, remember the KISS principle (keep it simple)!