Rolling 401K into self-directed IRA with Equity Trust; good move?

Question

Hey BP! I'm considering rolling my 401K from a company I left into a self-directed IRA with Equity Trust based on recommendations from several other investors. Has anyone here worked with Eq Trust before? Have you used your self-directed IRA to buy RE? Anything I should know before I make the move? Thank you!

Brian Eastman · Answer

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines. What I can help you do, however, is refine your question. Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with. A self-directed IRA custodian such as the firm you mention is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance. Some custodians are more responsive and customer focused than others, with the large majority being better options than one or two of the larger firms with big marketing reach that have been around for a long time and forgotten that their customers are the reason they are in business. A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines. A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money. So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

Randy Bloch · Answer

I personally like keeping my 401k or a part of it in stock equities for diversification purposes....I know this won’t be a popular position on BP. If your 401k is the majority of your net worth I could see doing it. In my situation it is about 50/50 RE vs 401k so I like the distribution.

Randy Bloch · Answer

100% with you...I'm sitting in a lot of cash right now as well. I have just cash out refinanced most of properties and waiting to see what happens with the economy. I definitely don't think stock market will be straight up from here...judging what I am seeing in my day job. I was planning on putting the cash to work in syndication deals to build a passive income stream....but now I am in wait and see mode as the stock market could still have a significant pullback and offer a nice entry point. It is hard holding cash....but I have taken some advice from video I saw of Warren Buffet this week about only swinging at strikes....he made the point how much better hitters are when they only swing at strikes. Hopefully, I can wait and swing at strikes :)

Frank Klarich · Answer

@Randy Bloch, I am of the same mindset. When rolling over funds into the SDIRA, I did not have to move everything. Instead, I could choose whatever amount to move from my IRA (rollover,) to my SDIRA. Thus, maybe the learning is to move your 401k over into a Rollover IRA first and then move over whatever amount to the SDIRA you are comfortable with. I agree with you in that I am also targeting a 50/50 asset allocation between stocks and RE. Personally, sitting on a large % of cash, and waiting for deals to pop...not comfortable putting another dime (outside of current 401k new contributions/investments) into the stock market.

Nicole Heasley Beitenman · Answer

If I could pull all my money out of the 401k without paying the penalty, I'd do it. Unfortunately, I thought the company match was worth it. It wasn't. So now I'm trying to figure out how to get this money working for me rather than sitting in the 401K doing, essentially, nothing.

George Blower · Answer

@Nicole HeasleyHere are some issues to consider in choosing an Self-directed IRA provider: 1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account. 2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC. 3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.). 4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.). 5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc. In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.

Lane Kawaoka · Answer

I use Equity Trust for my HSA.But you have to ask if a retirement account is even for you? Personally I don't have any of them because I want to pay my taxes today and get all the bonus deprecation now.

Hjiorst Fjioords · Answer

Hmmm... Sounds like you should investigate the things said by the one guy who directly answered your question. Looks like he has some experience. I personally don't know what you mean by "Equity Trust". Is that a financial company or a type of financial device?However, If you wanted to ask a more general question about the idea of investing in real estate with money from a self-directed 401k or IRA, you need not invest in an Equity Trust variety. I converted my solo 401k to a garden variety self-directed solo 401k to buy real estate. PM me if you want to know the details of who I finally went with to handle setting that up.

Carl Fischer · Answer

@Nicole Heasley I want to commend you on your decision to pursue self-directed retirement investing. To further build on the previous comments, you should choose what custodian/administrator fits you best. As a first-time SDIRA investor, I feel as though you should work with a company that is responsive, customer service oriented, and with a strong core of educational material. When it comes to SDIRA investing, the transactions, themselves, do not change largely from investing with any other entity. However, there are specific rules and regulations you need to follow to ensure you do not disqualify the account. You want to make sure that proper record of the transaction is kept from the start and that the investing entity is clearly the IRA and not you personally. When investing into alternative assets using your retirement funds, you as the account holder cannot provide nor receive a direct benefit from the IRA's investment. Examples of these types of prohibited transactions include, but are not limited to: you, or anyone of lineal ascent or descent from you, living in the property, working on the property, collecting rent or paying for expenses personally, et cetera. It all comes down to structure. I would be more than happy to discuss this in further detail whenever you'd like.

Curt Smith · Answer

@Nicole Heasley hi Search here on why I hate equity trust. In And the permutations of that phrase Before you make your move.We owned more than a dozen rentals in equity trust self directed I are a and we hated it so much so we spent thousands to move the titles and move the rentals to a different custodian. We chose a check book control custodian advantaira. Equity trust is proudly acceptable for a slow low transaction rate business like lending. But if you plan on buying rentals or buying realestate and have to have fast equity trust it's not gonna work for you.Equity trust was so badd they would even lose rent checks, Take so long to deposit them that the tenants check it counts would be overdrawn because the tenants thought the rent already came out...