Self directed IRA/Checkbook IRA?????

[Account Closed]

I'm looking at a company called Safeguard Advisors who deal in self directed ira's and other investment. I would like to know if anyone has used these guys. If not can anyone offer advised on where to go to open a self directed ira. Thanks in advance Hugo.

[Mike McDermott]

The Solo 401K is clearly superior. The reasons for that are many, and as such my list may be incomplete. But here goes:

1. Solo 401Ks do not need a third party administrator or custodian. Once the 401k is set up, you are the trustee. The bookkeeping is relatively simple on a Solo 401K, and you don't even need to file the 5500EZ form until your 401K is worth over $250,000.

2. No custodian means no custodial fees.

3. No delays in transactions due to custodial requirements. I wanted to borrow money from a friend who had a SDIRA. The custodian wanted my Articles of Organization for my LLC, and an Attorney Comfort letter. What the heck is that? Had he had a Solo 401K, he could have written me the check upon receiving the promissory note.

4. Participant loans are available in a 401K whereas your money is tied up until 59 1/2 in an IRA.

5. If used for business purposes, the interest you pay your 401K is tax deductible. PAY YOURSELF AND TAX DEDUCT IT! Not available at all in an IRA. If you want your money bad enough outside an IRA, you pay taxes and penalties.

6. When you invest in real estate using leverage, your transactions are 30 - 50% more profitable inside a 401K vs. an IRA (even a Roth). This is due to the obscure Unrelated Business Income Tax (UBIT). UBIT rockets to 35% even in small profits inside an IRA.

7. Establishing LLCs inside the 401K is easier than an IRA. Again you have custodian hoops to jump through with an IRA.

8. The Roth and Traditional provisions are established immediately on formation of the 401K. Separate accounts aren't needed, and you are trustee for both.

Now, as to who may establish a 401K: ALMOST EVERYONE! A sole proprietor can establish a 401K, hence there is no need for an LLC as far as the IRS is concerned. Unfortunately, most banks haven't received the memo, so your local friendly banker may want to see a "legitimate" business. Forming an LLC makes bank acceptance easier, but not necessary. Your Social Security number is all that's required to sponsor a 401K. That's how I established mine.

Technically, there is a question of parity that may restrict you having a 401K, but that only applies to people who own 50% or more of a business with employees that are covered by no retirement plan, or who only have access to SIMPLE or SEP plans. (This is a completely different rabbit hole, but I mention it to explain the "ALMOST" in "ALMOST EVERYONE!")

As to contributions: If I have old 401Ks from former employers, SIMPLEs, SEPs, Traditional IRAs, TSAs, TDAs, or 403(b)s, I can roll those over to my Solo 401K. I now can borrow money for my own personal use, or to generate income in my own pocket. I can self direct without custodial restrictions, and I can leverage inside my 401K with little or no UBIT. Can I contribute anything from my W-2 income?

No and yes.

I can always, always contribute to a traditional IRA from any source of ordinary income (passive or unearned income cannot be contributed). So if I'm really concerned about contributions, I can contribute to my Traditional IRA, then roll it to my 401K. Roths cannot be rolled to a 401K, so that avenue is closed.

But for most real estate investors, contributions from other sources are negligible. Establishing the 401K allows for real estate investing inside my retirement AND in my own pocket through participant loans. You pay less hidden UBIT tax, and ease of administration priceless. Once your real estate investing becomes profitable enough that you can quit your W-2 job, you start contributing to your 401K from any ordinary income you produce.

There is an excellent book called "Live Tax Free Forever" available on Amazon.com. It's worth a read.