Setting up a eQRP vs. SDIRA

[David Chwaszczewski]

Has anyone done an eQRP?  I am looking into the company Total Control Financial, but wanted to see if anyone has setup up one with the company before.  Seems like it may be better control of your money then SDIRA and less fees.  If anyone has setup a eQRP please let me know any Pro's or Con's.

Thanks!

[Mark Nolan]

@David Chwaszczewski

There is no such thing as that type of account. That appears to be a marketing term.

However, there is such a thing as a self-directed solo 401k plan which is very popular for those who are self employed.

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

• Both were created by congress for individuals to save for retirement;
• Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
• Both allow for Roth contributions;
• Both are subject to prohibited transaction rules;
• Both are subject to federal taxes at time of distribution;
• Both allow for checkbook control for placing alternative investments;
• Both may be invested in annuities;
• Both are protected from creditors;
• Both allow for nondeductible contributions;
• Both are prohibited from investing in assets listed under I.R.C. 408(m); and
• Neither may be invested in your own business. 

The Self-Directed IRA and Solo 401k Differences

• In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
• To open a self-directed IRA, self-employment income is not required;
• In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
• The solo 401k allows for checkbook control from the onset;
• The solo 401k allows for personal loan known as a solo 401k loan;
• It is prohibited to borrow from your IRA;
• The Solo 401k may be invested in life insurance;
• The self-directed IRA may not be invested in life insurance;
• The solo 401k allow for high contribution amounts (for 2016, the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
• The solo 401k business owner can serve as trustee of the solo 401k;
• The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
• When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
• Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
• When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
• Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
• Pre-tax IRA contributions on reported on line 32 of Form 1040;
• Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
• Roth solo 401k funds are subject to RMDs;
• A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
• Roth IRA funds are not subject to requirement minimum distributions (RMDs);
• The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
• The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
• At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
• At termination, the self-directed IRA is only required to file a form 1099-R.

[Mike Reynolds]

Originally posted by @David Chwaszczewski:

Has anyone done an eQRP?  I am looking into the company Total Control Financial, but wanted to see if anyone has setup up one with the company before.  Seems like it may be better control of your money then SDIRA and less fees.  If anyone has setup a eQRP please let me know any Pro's or Con's.

Thanks!

 That eQRP is nothing more than a self directed 401k. But it sounds catchy though. 

[Brian Eastman]

@David Chwaszczewski

The key difference when considering a Solo 401(k) (aka eQRP, makes me want to burp) and a self directed IRA is qualification. In may respects the plans are similar when it comes to investing with broader choices and more control.

A Solo 401(k) is designed for self-employed persons with an owner-only business.  This means there can be no non-owner employees working more than 1,000 hours per year.  If you currently have such self-employment, your business can establish this form of simplified Qualified Employer Plan.  Because the 401(k) is an employer plan instead of an Individual Retirement Arrangement, many of the plan-side features are more powerful, such as higher contribution limits, the availability of participant loans, etc.

Structurally, you can achieve full checkbook control over either an IRA or a Solo 401(k). In the 401(k), the plan is a trust and you can act as trustee. You simply establish such a plan through working with a professional plan provider, CPA, tax attorney, etc. You will then establish a trust account to hold plan funds and can use the trust and that account to go about putting the funds to work as you see best.

In an IRA, the model is different, but gets to the same place. An IRA account is established with a specialty self-directed custodian (think E*trade with different processing paperwork to get beyond stocks) and then that IRA is invested into a specially created LLC. The IRA owns the LLC and you can act as manager.

In both cases, there is a legal entity under the umbrella of the plan that you control and use to invest, without the need for 3rd party processing and per-transaction fees.

On the investing side, the 401(k) offers one advantage, which applies in the case where you might use mortgage financing for the plan to purchase a property. Both an IRA and 401k can leverage with a mortgage, so long as the mortgage is non-recourse - meaning no personal guarantee from you. In an IRA there is a small tax that comes with the use of non-IRA money to accelerate the growth of the IRA. In the 401k, this tax known as UDFI does not apply. The tax does not add up to much, but if you legitimately qualify for the Solo 401k, avoiding UDFI saves you some paperwork and expense.

Get on the phone and check out a few providers.  You'll quickly see who knows what they are doing, can recommend the best format for your situation, and will educate you on these topics so you can go out and succeed, and who is just marketing a set of plan documents.

[Justin Windham]

@David Chwaszczewski

As mentioned, the Solo 401k (sometimes referred to as a type of QRP) will carry many benefits over any IRA. For this reason, if you're eligible for the Solo 401k, it generally makes the most sense to go that route. Eligibility requires that you have some self-employment activity and no full time non-owner W2 employees.

I have not had any experience with that company before, but it looks like they charge almost 4 times what we do to set this up.

[Derrick Wallace]

@Justin Windham

Do you still need to have self-employed business activity if you just want to roll over from previous employer 401k plans to self-directed/solo 401k? The advantages of the 401k for the real estate investor and lower fees are very attractive. 

[Brian Eastman]

@Derrick Wallace

One does have to have ongoing self-employment in order to sponsor a Solo 401k plan.  A 401k is an employer sponsored plan, so there has to be an employer.

[Justin Windham]

@Derrick Wallace

Yes, you do still need to be Solo 401k eligible (which includes having self-employment activity) in order to setup a Solo 401k and transfer funds into it. In other words, the self-employment activity requirement is not just limited to being able to make new contributions to the plan, but is also imposed on having the Solo 401k in the first place. I agree, the Solo 401k is a very attractive option for those who are eligible. Note that self-employment activity can be part time and in addition to being employed full time.

[Derrick Wallace]

@Justin Windham

Thanks. I was not clear on that point. I will have investigate with my accountant if its worth setting up an LLC for post tax investments and utilize this route for tax advantaged accounts as well.

[Justin Windham]

@Derrick Wallace

You're welcome. When working with your accountant, keep in mind that the self-employment activity must be the type to generate earned income rather than passive investment income in order to be eligible for the Solo 401k. Having an LLC is not necessarily a requirement, but may be prudent move based on your intended activity.

[Mark Nolan]

@Derrick Wallace

See following for rules on self-employment income. 

https://www.irs.gov/individuals/tax-trails-self-employment-income-9

[Derrick Wallace]

@Justin Windham @Mark Nolan

Thanks vey much for the clarification. Perhaps my 1099 income would be enough to qualify me. 

[Mark Nolan]

@Derrick Wallace

That sounds correct. Contractors are basically sole proprietors which means the plan would be sponsored in your own name. 

[Justin Windham]

@Derrick Wallace

Yes, if you have 1099 income, you are likely eligible.

[Derrick Wallace]

Justin Windham Mark Nolan
Thanks again. That was very helpful.

[Bernard Reisz]

@Derrick Wallace Conflating "having a business" with "having a business entity" is very common. For the purpose of adopting a Solo 401k Plan, the IRS and tax code care about "trade or business" activity.

What is a "trade or business?" In the words of the IRS, "The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services." There's no reference to LLC or corporation in that definition. 

That addresses two erroneous assumptions that we hear all the time: (1) "I'm earning money from activity XYZ, but I don't have an LLC, yet. I'll set-up a Solo 401k once I get an LLC for my business and become eligible." (Note: This is a common misconception that can cost you thousands in taxes if you don't establish a Solo 401k/eQRP to shield your money from the IRS.); (2) "I'm not engaged in any for-profit activities, but I set up an LLC a few years - so I've got a business and can adopt a Solo 401k." (Note: That's another common misconception that can cost thousands in penalties for establishing a QRP/Solo 401k for which you were ineligible).

Another important takeaway is that it must be "for the production of income from selling goods or performing services," as opposed to investment income; i.e., real estate rental income will not qualify one for adopting a Solo 401k Plan.

[Meghan McCallum]

@Bernard Reisz I am so happy to have more people talking about SDIRAS again. I think it's the best way for people to be buying in this newly flat market.

[Justin Windham]

@Meghan McCallum

Was there a decline in people talking about self-directed IRAs and Solo 401k plans at some point? I agree, these can be a great way to get access to more real estate investments and/or diversify retirement portfolios away from more volatile or poorer performing assets.

[Bernard Reisz]

@Meghan McCallum When the stock market provides underwhelming performance, people definitely tend to gravitate to real estate. While each market - real estate and stock - has it's own risk/return profile, the comfort of owning a cash-flowing hard asset becomes more and more appealing when the stock market gets choppy. 

[Meghan McCallum]

Hey Justin! So, my comment on "again" would be due to the surge of discussion (though really bleak) I saw in 2015 again around the end of the year, for good reason. It's definitely not well known enough. Do you help people find depositors that understand the Solo K? Are there a large number of banks who except Solo K funds?

[Meghan McCallum]

@Derrick Wallace you know...you can have a simple side hustle producing income. You don't need to be self employed from an LLC. This is what I just wrote about in a piece I submitted for publication on how the Gig Economy presents new opportunities to the middle class investor. This is exciting stuff, but, its still available on a limited basis due to 1) some of the custodians popping up are advising on things they don't completely understand 2) We have found that most banks are confused and tell people they can't invest the way they want to because banks can't sell them anything they want (real estate) 3) Its not how we've done things in the past 4) THERE IS NO EASY BUTTON (working on it) that takes a person from education, to product, to investment opportunity. Until there is we won't see a general "buy in". But, there's $28+ Trillion dollars sitting there deserving better investment opportunities.

[Justin Windham]

@Meghan McCallum

Oh, I see. Yes, the end of each year is rush season, at least for Solo 401k plans, if not IRAs.

Yes, we do help people find banks and brokerages that can open accounts for the  401k trusts. Most institutions can do it, but some are much better than others. We have recommendations for our clients and provide support for those institutions that don't make it seamless.

[Dusty Clinkscales]

I use an eQRP account through Total Control Financial.  Aside from the fact that I control my money and don’t pay fees for using it - I also avoid UDFI tax which is triggered by UBIT in syndicated deals.  Anyone with any further questions, I strongly recommend that you reach out to Damion Lupo @ Total Control Financial. 

[George Blower]

@Dusty Clinkscales

You are essentially describing a self-directed solo 401k plan.

[Dusty Clinkscales]

@George Blower

Good Evening George, hope your week got off to a great start!  Yes, you’re reference to the solo 401k is correct.  The technical definition for a qualified plan is one that satisfies the requirements of IRC Section 401(a).  

[Meghan McCallum]

Calling it a QRP is marketing that's just further confusing people. The internet is just full of noise and you can normally tell who is behind the product when someone talks about it. 

If anyone wants to reach out to me on a PM I'd be happy to point you to in the direction the custodians can't point you to, how to find deals to invest in that the operator is underwritten as heavily as the deal. They are not my deals, they are deals Also, there is so much greed from syndicators right now! I mean Grant Cardone is giving 7% pref returns and keeping 35% equity after wholesaling deals to himself. AND he brags about it! People eat it up. They think they are getting a great deal. It's sad. I'm also concerned about the "I read a book and now I'm syndicating" "or flipping" "or raising capital" or I'm brokering off market deals and you are not a broker. YOU CANNOT TAKE A PERCENTAGE FEE of a sale of a property if you are not a broker/agent.