The Best Retirement Plan

[Will Barnard]

IRA/401k plans as they relate to self direction/self administered has been a hot topic lately and as such, I would like to attempt to get a consensus on experienced investors' perspectives to the following question:

What is the best qualified plan for us RE investors who have or want to have some type of self directed retirement plan?

Traditional or Roth IRA? SEP IRA? 401k? Solo K plan? or ????

NOTE: Let's not debate which is better - ROTH or Traditional IRA.

-Will Barnard

[Jeff S.]

First, let’s agree that any plan which allows you to invest tax free for a really long time, is a good plan. The rest comes down to personal need and nuance. It goes without saying that there are many ways to invest in real estate and your plan should fit your needs. Here’s the order, from simplest to most complicated (also simple, as you’ll see), in my opinion.

IRA’s let anyone with earned income invest before-tax income for tax free growth. If you pay the tax in advance, you can invest the after-tax income into a Roth IRA and enjoy the same tax free growth as well. The difference is Roth withdrawals are tax free.

Any business that has a payroll can open a 401k (traditional or Roth). It doesn’t have to be a corporation or LLC. Sole proprietorship's pay payroll and they can open a 401k.

Depending on your age, IRA contributions are currently limited to $6000 per year. Your 401k contributions are limited to $49000 on a relatively high percent of your income so 401k benefits are enormous.

You or your company can open an IRA or 401k, respectively, thru a company like Fidelity Investments or Schwab. Here, you have to invest in their products, which are pretty much limited to stocks, bonds, and mutual funds.

You or your company can also open a self-directed IRA or 401k thru companies like Pensco or Entrust and they will let you invest in almost anything except collectables and insurance and a few others. (I’m not trying to over-simplify, there are many rules you have to comply with behind these investments.) In this case your custodian will write the checks on your behalf. One benefit is that they will vet your investment and prevent you from making an overtly obvious prohibited investment, such as buying a home for yourself with your retirement funds. One detriment is that it can take weeks for them to draw the check. If you’re investing in time sensitive investments, such as hard money lending on REO’s, or paying hungry contractors, this won’t necessarily work. It can be perfect for investing in RE partnerships, syndications, and JV’s.

The next level is a self-directed plan (IRA or 401k) with checkbook access. Here Pensco, for example, will invest your retirement money into an LLC that you manage. The same investing rules apply except you write the checks yourself. You have the benefit of timely control and can write checks or wire money immediately. As a lender to flippers who sometimes call with deals that must be funded tomorrow (I’m not kidding) this can be very handy. The drawback is that an LLC can be expensive, especially in California, and it has to file a tax return. Custodians like Pensco make a lot of money with junk fees so choose your custodian carefully.

Next, and the ultimate plan in my opinion, is a self-directed 401k where you are the trustee. In effect, you become Pensco. Many companies (not Entrust or Pensco) will help you set the plan up. Google self-directed 401k and you’ll hit many. What you pay for is a dishearteningly simple 3-ring binder containing “The Plan.†That’s it. Really. You then open a separate checking account and transfer everyone’s retirement money into one account. There is no LLC. It’s you and your company and you must scrupulously keep track of the retirement roll-overs and contributions from each participant. One drawback is your SD-401k has to file a form 5500 tax return and there are annual fees for paperwork your administrator will likely provide to keep your plan current. One benefit is there are no junk fees. You now have checkbook access over an account that will accept both traditional IRA and Roth rollovers from all employees (my wife and I in this case), can contribute up to $49k tax deferred (or tax free in the case of Roth contributions) for each, and you have immediate control of all funds.

Sorry for the long post but I hope this helps a bit.

Jeff