Self directed ira to avoid taxes?

Question

Dmitriy Fomichenko · Answer

I don't agree with you that returns with real estate are limited when used as investment inside of a 401k. One of my clients @Shawn Holsapple was able to triple his account value in less than a year, I don't think you can do that with conventional IRA.

True - there is no depreciation deductions (in most cases) which is used to offset your income when you own real estate personally, but when you own real estate inside of a 401k the income is sheltered because it is a tax-deferred vehicle.

Financing is available, but the loan must be non-recourse. While most banks don't offer such financing there are several lenders who do and getting approved is pretty easy if the property qualifies. Try these companies:

https://www.biggerpockets.com/blogs/2810/50272-lis...

Brian Eastman · Answer

@Jordan MoorheadIf you are self-employed and have no full-time employees, then a Solo 401k may be an option.  The maximum contribution limit is $54,000, dependent on income.

Justin Windham · Answer

@Jordan Moorhead

If you are self-employed with no full-time employees, the Solo 401k will likely be the best option for you. The plan can be setup to allow for both pre-tax contributions and tax-deferred growth as well as Roth contributions with tax-free growth.

Mark Nolan · Answer

@Jordan Moorhead

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 2017, the  solo 401k contribution limit is $54,000, 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.

Edmund Ricker · Answer

@Jordan Moorhead your contributions to the a traditional 401K would be with pre tax dollars and earnings would grow tax deferred.  You might also consider a Roth 401k that would be funded with after tax dollars and earnings would grow tax free.

Your best bet is to consult a tax advisor who can examine your individual situation and give you the information necessary to make an informed decision.

Let me know if I can be of any further assistance.

Ed

Daria B. · Answer

Have you looked into Solo 401k, I believed they are for self employed but not sure of the limits.

Brian Eastman · Answer

@Jordan Moorhead

Yes, an IRA is a mechanism to set aside a portion of your income and defer the taxes on that income.  Growth the IRA receives via investment returns are also tax-deferred.  That allows you to grow the IRA and generate tax savings.

If you do not have any IRA savings at the current time, then setting up a plan with a generic Wall St firm will be your best option until you squirrel enough away to start thinking about investing in real estate.

It is a long term strategy, but one that will reward you well.

Self directed ira to avoid taxes?

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