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)!

[Zehua Zhou]

Quote from @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. 

 Hi Dmitriy,

      Can you please elaborate on "investing in illiquid assets such as trust deeds and converting them to Roth at a deep discount."? I am very interested in that. Where can I find trust deeds to buy?

Thank you!

Zehua

[Zehua Zhou]

Quote from @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)!

Thank you. I am very impressed with your knowledge and will definitely going with your firm for the simpler 401k trust plan, and I will get rid of the LLC.

Just for the sake of exercise, could anyone please still let me know if an IRA makes a private equity investment into an LLC and becomes the 100% owner of the LLC, and the LLC later receives tax forms against its EIN, will the owner of the IRA just disregard those tax forms? Or should the IRA owner give out the IRA's EIN instead of the LLC's EIN when he signs up with the bank and with the property manager? In that way, the IRS receives these tax forms and will see that the EIN is tax exempt. Otherwise if the IRS sees a 1099 against an LLC's EIN but never know where that income flows into, they may request an audit?

[Dmitriy Fomichenko]

@Zehua Zhou,

We're hosting a webinar on supercharging your Roth soon; watch for it!

Regarding your questions about IRA LLC. The structure is known as "Checkbook IRA". When using this structure for investments, the key is to complete IRS Form W9 properly. The correct way is to use the EIN of the IRA custodian instead of EIN of the LLC. As a result, any income reported will be tax exempt.

[Zehua Zhou]

Quote from @Dmitriy Fomichenko:

@Zehua Zhou,

We're hosting a webinar on supercharging your Roth soon; watch for it!

Regarding your questions about IRA LLC. The structure is known as "Checkbook IRA". When using this structure for investments, the key is to complete IRS Form W9 properly. The correct way is to use the EIN of the IRA custodian instead of EIN of the LLC. As a result, any income reported will be tax exempt.

I see! Thank you for the clarification!

But if I directly own 100% of an LLC, should I use the EIN of the LLC or my SSN for the W9? Or it probably doesn't matter?

[Dmitriy Fomichenko]

@Zehua Zhou, call me on Monday and I will clarify it for you.

[Ashish Acharya]

In dealing with these tax forms for your Solo 401(k)-owned LLC, you will use the 401k's EIN for the property manager and the bank. All of the income that will be created within your Solo 401(k) is tax-deferred in nature; therefore, these forms should not be issued under your personal SSN or the LLC's EIN.

Be sure that the property manager and bank have the correct EIN and mailing address of uDirectIRA to handle the reporting with the IRS. Reports will be filed by custodian, uDirectIRA, to the IRS to demonstrate income from such investments is tax-exempt. If you're unsure about any step, consult with a CPA.

[Zehua Zhou]

Quote from @Dmitriy Fomichenko:

@Zehua Zhou, call me on Monday and I will clarify it for you.

 Thank you! I left you a voicemail. Please call me back.

[Zehua Zhou]

I saw a comparison of IRA Trust vs IRA LLC from another website and found the following. I wonder if the same applies to 401K trust vs 401k LLC?

I am very confused what a 401k trust is because I don't see it listed in the types of available trusts below.

https://wyomingllcattorney.com/Wyoming-Asset-Protection-Trus...

I know land trusts don't offer liability protection if the tenant sues the trust's beneficiary. For 401k trusts, the property would be titled XX Custodian FBO (owner name). So can the tenant continue to sue the beneficiary which would be me?

[Zehua Zhou]

Quote from @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)!

Could you tell me if there is a way to maintain anonymity when owning properties directly in 401k trust? The property would be titled as "XYZ 401k plan, FBO (my name)". So if a slip and fall happens, tenants could look up that in their lease, and sue both me and my 401k trust. If we have a 401k checkbook LLC then it could fix the anonymity problem but it adds a layer of complexity. If we don't have the 401k checkbook LLC, is there a way to do it?

[Dmitriy Fomichenko]

@Zehua Zhou, you don't need the FBO part; keep your name out of it. But if you want complete anonymity, use a land trust. Obtaining an adequate amount of liability coverage should cover liability concerns.