Self directed 401k questions. PLEASE HELP!!

[Ken Scarbrough]

Hello everyone,

I have a question that been bothering me for quite some time. I’m hoping some of you with more experience can help spread some light on the situation. I’ll try to be to the point.

For years I’ve been reading about a strategy in which someone can use there 401k account to invest in real estate without the penalties by turning it into a Self Directed 401k. I’ve seen this in many articles and heard about it through podcasts.

However, when I try to do this I hit a wall. I’ve called the company that directs my 401k (Charles Schwab) and they tell me this is not something you can do. I’ve also called Empower Retirement when they took over managing the 401k and was told something similar.  My 401k I provided through work and I live in the state Indiana.   

Is there something I’m missing?? Thank you for any assistance that you can provide. 

[George Blower]

@Ken Scarbrough

One way of determining if your current employer will allow you access your retirement funds while still working for them, is to check the summary plan description (SPD) for the existing plan. The SPD is required to be written in a language or format that is easily understood by participants. Larger plans usually make the SPD available on the company’s benefits website. If the SPD is not available, the plan administrator or human resources department should be contacted for a copy of the most updated version.

If they will allow you to transfer some of the funds while still working , then if you are self-employed, you can open a solo 401(k) plan as previously mentioned. If you are not self-employed then an IRA can also be opened.

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 2017, the solo 401k contribution limit is $54,000, 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.