SD IRA (or solo401K) question

[Jeff Caravalho]

Hi BP,

2 part question: 1. Can I start an SD IRA (or solo4 401K) without forming an LLC (fees would destroy ROI). I am looking to invest in performing mortgage notes that are passive (no trading, note terms longer than a year & someone else finds the borrower). I would like the interest from the notes to be deposited directly back into the IRA. I'm assuming "checkbook control" is not critical in this investing scenario, correct me if I'm wrong.

2. What would be the best IRA setup for this passive investing scenario? SD IRA or solo401K? I'm self-employed so either would work.

3. Would you use your SEP IRA or Roth IRA to start out?

@Darren Eady & @Dmitriy Fomichenko, I would appreciate your input on these, thx.

[Dmitriy Fomichenko]

Originally posted by :

Hi BP,

2 part question: 1. Can I start an SD IRA (or solo 401K) without forming an LLC (fees would destroy ROI). I am looking to invest in performing mortgage notes that are passive (no trading, note terms longer than a year & someone else finds the borrower). I would like the interest from the notes to be deposited directly back into the IRA. I'm assuming "checkbook control" is not critical in this investing scenario, correct me if I'm wrong.

2. What would be the best IRA setup for this passive investing scenario? SD IRA or solo401K? I'm self-employed so either would work.

3. Would you use your SEP IRA or Roth IRA to start out?

@Dmitriy Fomichenko, I would appreciate your input on these, thx.

Jeff, IRA and 401k are two distinct retirement plans. While anyone can setup an IRA, Solo 401k is not for everyone - it is a qualified retirement plan designed for those who are self-employed or own a small business without full time employees other than the owner(s) or his/her spouse.

You don't need an LLC to do either one. The LLC comes into play if you wish to have a checkbook control over an IRA. Then special purpose, single-member LLC is established, the member (owner) of the LLC is your IRA and the manager is you. IRA buys units of the LLC and funds are transferred into LLC's checking account. As manager you are in charge of the LLC which give you checkbook control over your IRA assets and that is how you bypass the custodian. With this structure you don't eliminate the custodian (which is required by IRS), you simply bypass them since all of the transactions are done in the LLC. They become a 'passive' custodian and you still have to pay basic fee to maintain your custodial account. But all of the transaction and asset-based fees are eliminated.

If you qualify for a Solo 401k - then you will be much better off going this route compared to SD IRA (and Checkbook IRA as well). Solo K has several major advantages over SD IRA which makes it much more superior plan. I am not going to go in all details here but if you wish to learn more you can read this post:

http://www.biggerpockets.com/blogs/2810/blog_posts...

Solo 401k would be a better choice for passive investment scenario (or any other scenario for that matter) since it provides you with the checkbook control without the need for LLC and additional cost that comes with it; the need for a custodian is also eliminated. The only one exemption I can think of when you would go IRA instead of Solo K is this: if you have funds in a Roth IRA that you are trying to self-direct. Since Solo 401k does not accept rollovers from Roth IRA - you will need self-directed Roth IRA in this case.

And to answer your last question about using Roth: well, of course it is best to invest tax-free, but the question is would it be best for you in your current situation, current tax bracket, etc. to contribute into Roth vs. tax-deferred contributions and get a tax break now? That is something that I can't answer for you. You probably need to get together with your CPA and have a discussion about this. But generally the younger you are - the more beneficial it will be to invest in a Roth: you have more time to grow your wealth tax free.

Hope this helps.