SDIRA vs Solo 401k for funding Kids College?

Question

My wife is the breadwinner in the family, and I take care of the kids and invest in real estate.  I have taken on the responsibility of funding the kids college and have been researching SDIRA and Solo 401k (lots of information on here which is why I signed up today).   I have no money to roll over to the account, so I will be funding these from scratch.  Initially, I will be purchasing tax foreclosures as the investments which may require payment the day after I purchase them.

My CPA suggested setting up an SDIRA in my kids name (my llc pays them) because college expenses can be withdrawn without penalty, but for what I want to invest in, a Solo 401k in my name appears to be easier and cheaper.  Either way I will need to be able to write a check quickly.

What do you think?

Thanks, Adam

Troy Fisher · Answer

Now, I haven't delved too deep into this and you need to find the right legal representation to do it, but if you are operating as a C-Corp, you can Administer the companies 401k funds for a retirement vehicle outside of the regular business of the company. So you gain some benefits if you are a C-Corp (transactional real estate) you can use the 401k to do Buy and Hold and wrap up a lot of different tax strategies.

Again. These are hints I've heard, nothing I've got true experience with, and I definitely suggest talking to multiple cpa's and tax attorney's to get a better idea.

Justin Windham · Answer

Hi Adam. It seems you have 2 potential interests in self-directed retirement accounts - funding kids' college and for your own investment.

As you mentioned, the Solo 401k is likely to be less expensive and will definitely be the more flexible and powerful option for your investing (no need for LLC to have checkbook control, no need for a custodian, much higher contribution limits, etc).

Another potential benefit is the participant loan feature of the Solo 401k which can allow you to borrow funds from the 401k without taking an actual distribution. This may be helpful when it comes time to fund college tuition. You wouldn't be able to do this with an IRA.

Perhaps some others will chime in with more perspectives, but I almost always favor the Solo 401k over an IRA if one is eligible.