50k SDIRA or Solo-401k, ideals on which and what strategy?

Question

Hey Everyone,

I've got about 51,500 in a TSP account that I can't contribute to anymore since I'm no longer in the Marines. Part of this money is Tax-deferred, part is ROTH, and part is tax-exempt (from contributions made in tax-free zones). So i have 3 questions.

1. I know SDIRA (or checkbook) and solo-401k are both popular, but if I qualify for solo-401k, is there a reason not to choose that over the SDIRA?

2. Am I looking at any detriment by putting tax-exempt funds into one of the above mentioned accounts? Would it, or the proportional proceeds, become taxable? Currently any proceeds from the tax-exempt funds in my TSP are tax-exempt forever, but when you do a withdrawal it's withdrawn proportionally also, so no way to leave the tax-exempt money in the account and only pull out the deferred and Roth money.

3. What strategies are best for the 2 types of self directed accounts? I was thinking notes, but finding good notes in an area I'd be willing to foreclose in is difficult, I only know of PPR notes and FCI Exchange. 50k doesn't seem like enough to get into lending and I'm not an Accredited investor.

Sorry for the long post, any ideas are welcome. Any personal experience moving funds from TSP to Solo-401k or SDIRA would be very welcome.

Cheers!

Daniel Dietz · Answer

@Donald S. I can only address the SDIRA vs SOLO401K issue, as I have both.

Originally I opened a SDIRA as I did not KNOW about the SOLO401K at the time.

IF you qualify for the SOLO401K (must have self employed income as the main criteria) in MOST cases they are better; larger contribution limits, easier to leverage with less paperwork involved.

I had a LOT more funds to 'roll over' than current income to make large additional contributions with. I rolled a large portion from my SDIRA over to the SOLO401K once in new about it. The one 'downside' of SOLO401K that I ran across is that you can NOT roll a ROTH IRA into anything other than another ROTH IRA, so that meant it had to stay in my ROTH SDIRA.

I am not sure if the same RMD, required minimum distributions, rules apply to the SOLO401K when you reach age 70 as there is with Traditional IRAs.... something to think about for some people.

In my case, I am mostly interested at this point in Buy-n-Hold Rentals. We (I have two partners I invest with) are able to get 10-15% returns all day long after accounting for all expenses. It also offers us the option down the road (we are all 10-15 years away from retirement age) of having high cash flow with paid off properties or selling with owner financing at favorable interest rates.

You are on the right path doing your homework upfront to have a clear plan!

Dan Dietz

Carl Fischer · Answer

@Donald S.

Thank you for your service. Your questions are excellent for starting out.

Your first question -Ira or 401k?  If you can’t do both and are eligible for a 401k do the 401k. I personally have multiple plans-401k, multiple Roth and traditional IRAs, HSA, and several CESAs. Obviously I want as many plans as possible that I can contribute to and grow tax free. I personally am biased toward tax free and real estate and notes.

There are ordering rules to all the accounts for distributions. Keep your paperwork, documentation, and monies accurately accounted for and  when it is time to distribute your cpa will be able to help. Keep track of the different types of monies-tax free, deferred, exempt and the earnings associated with each type and you should be fine.  Excellent Bookkeeping is a must especially if you are doing it your self. The tax status should not be affected unless you convert from a tax deferred to a tax free for example. You should be able to keep the tax status for each type of money or improve it with transfers and a good network of people based on your particular situation and goals.

Do transfers and/or direct rollovers from on custodian to the other-institution to institution. It limits the chances of being taxed or penalized.

You can have multiple IRAs  but only one active 401k.  Distributions are mandatory from a 401k at 70.5 years old but not a Roth IRA for example. Yearly reporting is more complex for a 401k sometimes. These are examples of a couple of differences but I wouldn’t worry about them.  There are ways to  limit the idiosyncrasies of plans that do not meet your needs.

Either type of account,401k or Ira, will work for note investing as well as many other investments.

Congratulations on knowing of PPR & @Dave Van Horn -have you checked out Davs’s new book for ideas and strategies? There are several strategies that could easily work with the $50k. If you need more info PM me or email and I will provide you approximately 20 examples of strategies clients have implemented using smaller self directed accounts over the years. Many strategies include using notes as well as real estate. Join a network of people who do what you want to do. If you can’t find one start your own meetup. I know many people in St Louis doing similar type of investments. Getting into the BP community is a good start.

I wish you the best.

George Blower · Answer

@Donald S.

The tax exempt funds may not qualify to be transferred to an IRA or a solo 401k plan. I would double check with the TSP administrator.

A solo 401k and IRA can both (for the most part-for example an IRA cannot be invested in life insurance but a solo 401k can) be invested in the same types of investments. They can  both be invested in notes, real estate, metals, tax liens and private equity, to name a few.

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; and
• Both are prohibited from investing in assets listed under I.R.C. 408(m)

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 2018, the solo 401k contribution limit is $55,000, 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

Carl Fischer · Answer

@daniel Dietz

Yes yes yes yes your right.

No age restrictions on rolling out of 401k to Roth IRA.

All Roth money is tax free -the roll to Roth IRA is to stop RMDs on a Roth 401k. You  don’t have to tell me how stupid it is-I know- it’s the government. You don’t have to know why just Play by the rules. Tennis the white line is in-football the white line is out-go figure.

Daniel Dietz · Answer

@Carl Fischer

To make sure I am understanding things right this is my thoughts;

• I can NOT roll a ROTH IRA into a SOLO401K plan. Almost all other forms of retirement accounts CAN be rolled into a SOLO401K generally speaking.
• I CAN convert "Traditional IRA" funds into a ROTH portion of the SOLO401K AFTER I roll them into SOLO401K Plan.
• BOTH Traditional Funds and Converted ROTH Funds within the plan require RMDs, Required Minimum Distributions, once I reach 70.5 years old.
• Even though I cant roll ROTH IRA funds INTO a SOLO401K plan, I CAN roll ROTH funds back OUT of the plan into a SDIRA ROTH IRA to avoid the RMDs if I would chose to.

Is there any age restrictions when that could be rolled back out? As in, could I decide at 75 or 80 that was the time to do that? Is there any kind of tax implications in doing that, or do all funds remain tax free?

Thanks, Dan Dietz

Justin Windham · Answer

@Derek Gruening

That's right.

Derek Grue · Answer

@Justin Windham

So you’d only avoid the UDFI if the asset was owned free and clear before the rollover to an IRA?

Justin Windham · Answer

@Derek Gruening

The investment would generally be exposed to UDFI on income after the transfer to the Roth IRA.

Derek Gruening · Answer

@George Blower,

What happens if you own real estate in a Roth SOLO 401k (avoiding UBIT and financed with a non-recourse mortgage) then rollover that asset to (In-Kind service distribution I believe is the technical way of explaining it) a Roth IRA before the mortgage is paid off and is owned free and clear? --Are you then exposed to UBIT since it's in a SDIRA?

Carl Fischer · Answer

@Daniel Dietz

You will have RMDs at 70 .5 years old-For traditional money and Roth monies. You will be able to move Roth 401k money to Roth IRA at 70 and not have Roth RMDs if you choose to.

50k SDIRA or Solo-401k, ideals on which and what strategy?

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