What is Better ? A self Directed IRA or Solo 401k for RE

Question

I am in the expansion process of my RE investing company and need to reduce my IRS Taxes.

What is Best to use ? A. Roth IRA or Solo401k ?

David Chance · Answer

Just to throw in my two cents... I have both and I like using my Solo401k more.  It's easier and has less fees.

Jeff Filali · Answer

As long as you're self employed and have the excess income that you do not need now, I would recommend a Solo 401K with both regular and roth accounts.  Use the regular acct to save money tax deferred, then build the roth with excess savings you have to grow long-term.  This opens so many options to grow your retirement.   This allows you to contribute up to $56K year.  You can borrow up to $50K (1/2) from your account if needed and repay with interest.  You can also use leverage in both accounts.  Definitely should meet with a good CPA and Tax Attorney prior to setting this up to make sure you do what's best for your situation.  Everyone's situation is different.

Another potential tax savings if fully self employed, with plenty of regular income available, is changing your taxation to be LLC as an S-Corp to save on self employment. Again, discuss with CPA and Tax attorney to make sure this fits your needs.

Also, don't forget about using Section 179.  Its one of the most overlooked deductions that we can use as business owners.

Bob Malecki · Answer

I would say both. You can build up your self-directed IRA characterized as a Roth tax free but if you're self-employed you can also set up a Roth characterized solo 401k. As a Roth you're not going to get any tax breaks presently but you will build up your wealth tax free. You could make your employer contribution to your solo 401k as a traditional component and defer those taxes into the future.

Brian Eastman · Answer

@Marco Chaidez  A discussion with your CPA/Tax Strategist will be most productive.

A Roth IRA will not reduce your taxes, but will allow you to take the savings you put aside and grow that tax free.

A Solo 401(k) allows you to make tax-deductible contributions and reduce your current tax burden.  The plan allows for up to $56K in annual contributions depending on your business income.  You must be self-employed with no full time employees (i.e over 1000 hours per year) in any company you control in order to have a Solo 401(k).  You can also pursue some Roth strategies within a Solo 401(k).

As a plan provider, our focus is less on tax strategy for your operating business and more on helping you take the money you have saved in any version of retirement plan and being truly diversified with your investing.  Our plans are self-directed and capable of investing in alternative assets such as real estate.

Dmitriy Fomichenko · Answer

@Marco Chaidez

If you are eligible for a Solo 401k - it has several advantages over an IRA, also it can allow you to make post-tax contributions into Roth 401k account, or perform a Roth conversion. However please note that if you already have Roth IRA - it can't be rollover over into Roth Solo 401k as IRS does not allow this, in such case your only option would be self-directed Roth IRA.

Ability to make large contributions to a Solo 401k make this great tax-sheltering vehicle, but the investments you make with either one will not affect your personal taxes because both are considered "qualified retirement plans" and will not have any effect on your personal taxes.

The main difference is that if you use leverage to make RE investment inside of an IRA will result in UBIT tax on Unrelated Debt Financed Income, however income from leveraged real estate in a Solo 401k will be exempt from this tax.

You may want to explore this thread for in-depth discussion:https://www.biggerpockets.com/forums/51/topics/527877-self-directed-solo-401k-for-real-estate-investors-q-and-a

Chris Seveney · Answer

@Marco Chaidez

reach out to @Brian Eastman who can assist

What is Better ? A self Directed IRA or Solo 401k for RE

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