Which Self-Directed IRA to Use

Question

Does anyone have suggestions as to which self-directed IRA to use for real estate transactions? I am looking to convert a old 401(k) account that has sat idle for some time into a self directed IRA to do short term (120 days) pipeline loans for other investors in my market.  I am looking for good customer service, low rates, ease of transaction since I will be doing around 3 to 5 a year.

David Beard · Answer

Alex Craig - I'll strongly advise that you open a Solo 401k account (ie. self directed 401k).  I set mine up through mysolo401k.net, and they have been great to work with.  I use it primarily for lending, as you indicate.

In this setup, your 401k funds will be transferred to a regular account at your local bank.  You will have complete "checkbook control", meaning that you are the sole trustee and write all the checks (to fund loans, etc.), and collect all rents, interest, and other fees.  There is no cumbersome administrator to work with, slowing things down and charging you fees on everything.

Because it's a 401k, it has these advantages over an IRA:

* No need to set up an LLC (and incur the associated fees) to get the checkbook control at your  local bank (the IRA would require both an LLC and use of a 3rd party custodian)
* Can borrow up to $50k (max of 50% of total plan balance) from the account to use for any purpose.
* Your 401k can borrow from a bank or private lender without having to worry about UBIT tax (unlike an IRA).
* MUCH cheaper over time than having a SDIRA with a custodian like Equity Trust or Guidant.  There is a one-time fee for plan setup, and then a modest yearly adminstrative fee.   Beyond that, there are no other charges.

Jeff Barnes · Answer

Alex Craig- you can't continue to contribute to a SD 401k since you have full time employees (full time being the keyword there).  However, if you have a business that you can get modest income from by means of a shell organization or even a small management company, then you can set up a SD 401k and roll your funds into that, and use those funds for investing purposes.

The process of rolling over your 401k is rather simple and painless, assuming you have a good company working with you.

Steven Hamilton II · Answer

Alex Craig,

One of the common things to allow you to utilize a solo 401k without providing it to other employees is to use a staffing company that receives pay from the corporation for purpose of paying you and your wife your salary that way you are eligible.

-Steven

LEONID ORLOV · Answer

I agree with Jeff,
Solo 401K is a great mechanism for investor.
I opened one and rolled over IRAs and 401k from previous employers. My plan assigned me as an administrator and treasurer.

I pay no fees to any 3rd party company and is not nickeled and dimed on every transaction.
I have landed money to unrelated parties, with payments going to Solo 401k.

I am not sure though, if one can use these finds to buy income property that is deeded to one's name (seems like self-dealing, which is no,no)

Alex Craig · Answer

It appears I would not be able to utilize the SD401k b/c I have several employees in my business.

Alex Craig · Answer

Thanks for the feedback.

Jeff S. · Answer

Hi Chris,
I should have been clearer. You can roll traditional IRA money into a traditional SD401k but you can’t roll a Roth IRA into a Roth SD401k plan.

If that didn’t confuse you see Table 1-4 Rollover Chart (page 23) in  IRS Publication 590 Individual Retirement Arrangements (IRAs)

Of course you can roll Roth 401k funds into a Roth SD401k. Sorry for the confusion.

Jeff

Chris Weiler · Answer

Jeff, are you sure you can't roll over a Roth 401K into a Self Directed Roth 401K? I'm pretty sure one can do this. Now I do know you can't convert a Roth IRA into a SD Roth 401K.

Jeff S. · Answer

A few clarifications:

1) Both an SDIRA and SD401k are subject to UBTI.  That is, neither of these tax-free plans can invest in an active business and compete against for-profit businesses without paying a tax on their Unrelated Business Taxible Income.  Investments in a C-corporation, such as publically traded stock, are exempt.

On the other hand, unlike an SDIRA, SD401k’s are exempt from Unrelated Debt Financed Income (UDFI).  Here, for example, an SD401k plan could borrow non-recourse money toward the purchase of a property and not pay any tax on the profits.  An SDIRA would pay tax on a pro-rata percent of the profits.

It’s easy to confuse UBTI with UDFI.

2) Any husband and wife, self-employed or not, can open an SD401k.  It’s best, but not required, that their sponsoring company is profitable and has a payroll, because that where the 401k contributions come from.  The sponsoring company can be a sole-proprietorship.

3) The best benefit of all, which David Beard forgot to mention, is that you (really your company) can contribute approximately $50k per person in an SD401k plan (approx. $100k total!!!).  Compare that to the roughly $5k or $6k annual limit for an SDIRA per person.

And yes Alex Craig, you can roll your old 401k into your SD401k plan as long as it’s not coming from a Roth plan.

Rick Baggenstoss · Answer

You can use a solo k only if you're self-employed.  Otherwise, SDIRA is the only way to go.

I use UDirect.  They're great except for ease of transactions.  That's not a reflection upon them.

I failed to set and buy into an LLC for checkbook control.  I'm learning the ways of UDirect so I can move towards more autonomy.

Good luck,
Rick

Which Self-Directed IRA to Use

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