Plan for Self-directed Retirement Account - Thoughts?

Question

I have an opportunity to roll an existing 401k into a new self-directed account. I would like to use that account to fund a real estate investment business. After reading through this forum, listening to the Jeff Brown podcast #017, and speaking with people who know better than me; I've roughed out this plan. I still feel like I am a ways away from a strong execution plan.  Any feedback would be great.

Some background info:

• Currently focused on fix and flips, but open to any opportunity
• The account is from a previous employer
• I currently have a loan against the account for a rehab that will be on the market in a couple of weeks - It’s in a fast selling market and I don’t expect it to sit long

Plan:

• Roll the total of the existing 401k into a self-directed account
• Solo 401k or IRA?Does the business need to be already established to do this?If I do, can I start a business now before the home sale and consider that sale revenue of the business?What are the benefits or pitfalls of doing that?Who to talk to – lawyer, CPA, financial adviser, and/or other?
• Solo 401k or IRA?
• Does the business need to be already established to do this?
• If I do, can I start a business now before the home sale and consider that sale revenue of the business?
• What are the benefits or pitfalls of doing that?
• Who to talk to – lawyer, CPA, financial adviser, and/or other?
• Use some percentage of the self-directed account to fund the growth of a real estate investment business
• How does the IRS or trustee define “fund the growth of a real estate business”?
• How does the IRS or trustee define “fund the growth of a real estate business”?
• Use the profits of the business to pay dividends into the account on a periodic basisIs it legal to pay a retirement account dividends?
• Is it legal to pay a retirement account dividends?

• Solo 401k or IRA?
• Does the business need to be already established to do this?
• If I do, can I start a business now before the home sale and consider that sale revenue of the business?
• What are the benefits or pitfalls of doing that?
• Who to talk to – lawyer, CPA, financial adviser, and/or other?

• How does the IRS or trustee define “fund the growth of a real estate business”?

• Is it legal to pay a retirement account dividends?

Brian Eastman · Answer

Account Closed

Your goals line up with the ROBS program.  The issue with the Solo 401k is that everything must be done at arms length.  You clearly want to be hand's on in a real estate development company.

Brian Eastman · Answer

Account Closed

It sounds to me like your goals are in-between a Solo 401k  and a Rollover As Business Startup.

In a Solo 401k, all plan activities must be done entirely at arm's length.  You are not "creating a business", but simply diversifying your tax-sheltered retirement savings into alternative assets.

Passive investments in such a plan are entirely tax-sheltered.  Flipping properties is a trade or business activity and generates Unrelated Business Taxable Income (UBTI) to a retirement plan.

A ROBS plan, by contrast, allows you to use existing retirement capital to capitalize a business in which you can be directly involved and receive compensation.  The business will be a taxable entity and the retirement plan is a shareholder.

The practical and tax implications of both models are very different, and there is no middle ground.  You will likely want to start by speaking with a specialist in the self directed plan field to get a handle on what your options are relative to your goals.  Once you have done that, you will certainly want to speak with your tax advisor(s) to ensure you are on the right track.

Account Closed · Answer

Thank you guys for such great information.

Just for clarification, here is my concept in a nutshell:

• Acquire properties to fix and flip, fix and hold, or wholesale
• Owner/operator will be a wife/husband teamReal estate agent for power to buy and sell (commissions may be useful, not sure if necessary)Personally engaged in procurement activities, project management, and administrative activitiesExpecting to employ full-time help in future phases of development
• Real estate agent for power to buy and sell (commissions may be useful, not sure if necessary)
• Personally engaged in procurement activities, project management, and administrative activities
• Expecting to employ full-time help in future phases of development

• Real estate agent for power to buy and sell (commissions may be useful, not sure if necessary)
• Personally engaged in procurement activities, project management, and administrative activities
• Expecting to employ full-time help in future phases of development

Let me see if I’ve got this right…

Solo 401k:

• Investment must be in an existing business  already producing a self-employed based income for owner/operator/investor – no full-time employees
• Personal income must be a result of actually performing a role in the business, as in not a 100% automated system. No commissions or benefits from sales of assets; rather, salary or wages and bonuses. I assume roles are open to interpretation and that outsourced help is acceptable so long that it is contracted. In other words, the owner/operator/investor is not stuck doing everything to maintain business.
• I assume net profits would roll into capital spending for business growth and into retirement fund

I’m confused by these two statements: "you cannot open a solo 401k if your business only generates passive income…” and “…the solo 401k which is used for investing passively in assets such as real estate…” Would you mind clarifying Mark?

ROBS Plan (Sounds like that one has my name all over it…bad joke, sorry)

• The funds from the plan can be used to start-up a C-corporation
• That corporation must offer either (or can it do both?):Goods or services (i.e. retail flips, property wholesaling, investor lending)Or invests at least 50% in real estate assets that are under the control of the corporation (i.e. rental properties as opposed to REITs)
• Goods or services (i.e. retail flips, property wholesaling, investor lending)
• Or invests at least 50% in real estate assets that are under the control of the corporation (i.e. rental properties as opposed to REITs)
• I assume in an autonomous corporation in which the plan is merely a shareholder, there is a greater level of level of authority provided to the operators on how money is managed than provided by the Solo

• Goods or services (i.e. retail flips, property wholesaling, investor lending)
• Or invests at least 50% in real estate assets that are under the control of the corporation (i.e. rental properties as opposed to REITs)

For the ROBS Plan - Can the requirement for 50% investments in assets be project-based (i.e. spec building)?

For either Plan - Is there a conflict of interest if an LLC I have vested interest in does business with the company being funded by my SD account?

Account Closed · Answer

Thanks for the response Brian. Good info, that makes sense.

I have read a little about the ROBS plan, but need to do some more research. It sounds interesting, if not a little intimidating. I am sure that there are business types the plan favors?

Mark Nolan · Answer

@Robin Williams

Here are the differences between a solo 401k plan and a ROBS 401k:

Per IRS Publication 560-the publication dealing with retirement plans for the self-employed  including a self-employed plan such as a solo 401k plan, you can adopt a  solo 401k plan if you have net earnings (compensation) from  self-employment in the trade or business for which the plan was set up.  Your net earnings must be from your personal services, not from your  investments.

The key part of this sentence is “not from your investments.”  Essentially, this means that you cannot open a solo 401k if your  business only generates passive income, meaning that you are not  actually doing work.

You may not personally benefit from any of the solo 401k investments.  For example, you may not receive a commission or other type of fee  resulting from the sale of a solo 401k asset (e.g., a real estate  holding). Reason being, as the solo 401k owner you are considered a  disqualified party and therefore may not personally benefit from the  assets of the solo 401k plan.  Lastly, you may not use the solo 401k  assets towards qualifying for self-employment activity in order to setup  a solo 401k.

Unlike the solo 401k which is used for investing passively in assets  such as real estate, for example, the ROBS 401k plan may be used to fund  one’s own business, provided the business qualifies as an operating  company (by offering goods and/or services) or real estate operating  company (see requirements discussed below). Further, the ROBS 401k  funded company will allow you to take a salary as a W-2 employee. The  ROBS transaction requires the use of a C-Corporation because the 401k  buys stock shares in the C-Corporation. An S-Corporation may not be used  because the S-Corporation rules do not allow Trusts as shareholders and  all 401k plans fall under the trust category.

As such, if you wish to invest your ROBS 401k retirement funds in a  company that will invest in real estate, the business must qualify as a  real estate operating company which will require satisfying the  following two conditions:

a. At least 50 percent of the assets of the corporation, valued at  cost, must be invested in real estate which is managed or developed and  with respect to which such entity has the right to substantially  participate directly in the management or development activities.

b. Such entity in the ordinary course of its business must be engaged  directly in real estate management or development activities.

Account Closed · Answer

@Brian Eastman After much research during this conversation, I agree. That seems to be the only option from my layman perspective.

Plan for Self-directed Retirement Account - Thoughts?

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