Originally posted by @Michael O'Byrne:
@Jeff Wallace ,
I opened a BORSA with an accounting firm here in Houston this past May. It's too early to tell how really cumbersome it is with regard to accounting, taxes, annual filing, etc., because I haven't worked through most of it yet in practice, but it seems relatively straightforward. The main thing is to avoid triggering a "distribution" by following all the federal rules for maintaining and managing your new 401K. Still worth it of course, but the main drawback for me is the extra hassles of managing a C-corp vs. a sole proprietorship or LLC, e.g. double taxation on FICA and Medicare, paying workers comp tax, and having to buy general liability insurance for lawsuit protection. I priced $1,000,000 per occurance GL insurance recently, and it will cost me almost $5,000 per year (based on rehabbing 10 houses per year). Keep in mind that under the BORSA arrangement, your new 401K actually owns the C-corp because it holds all the shares of stock, which seems to me more vulnerable to lawsuts than operating as a LLC. So, I am investigating a way to form a LLC under the BORSA C-corp to do business. As I understand it, you can't form a stand-alone LLC and borrow funds from the C-corp to do rehabs or it will count as a distribution/withdrawal of your 401K funds, and you will have to pay the income tax and early withdrawal penalties on the entire 401K. Finding an attorney or CPA to form the LLC under the C-corp is proving to be challenging as most of them aren't familiar with the BORSA set-up and don't want to be held liable if a distribution event is triggered.
Have you considered forming an LLC that your C-corp then acquires and becomes the sole member/owner of instead of trying to borrow from the C-corp to fund the LLC? You could go a step further and make the LLC a Series LLC instead of a traditional LLC, which should provide you with an additiional layer of liability protection. I am in the process of using a ROBS to acquire a real estate franchise that specializes in buying homes from homeowners looking to sell their homes for cash. If I choose to buy their homes I have the freedom to treat them as flips, assignments, or buy and holds. Because I'm using rollover funds to purchase the franchise, I will need to use a third party to do all my rehabs in order to maintain compliance with the ROBS structure. As an employee of the C-corp I will be able to draw a salary, receive bonuses, and make tax-free contributions back into the 401k plan for future profit sharing. I can also lease assets to the C-corp. All of the above will written off as corporate expenses come tax time to reduce the C-corp's tax liability. Also, just as with the Solo 401k my ROBS 401k has a participant loan feature built into it that allows me to obtain a personal loan up to 50% of the value of the plan. These funds can then be used to pay off virtually anything, personal or business. The plan also has a Roth sub-account option (same as Solo 401k) that will allow me to make pre-taxed investments and let the profit grow as it would in a Roth. No income restrictions on this account either. The main issue with this setup is the buy and holds. By using the C-corp to hold an asset that generates passive income, I'm going to incure UDFI if I've used debt for acquisition. If I use cash to acquire rentals then I'm fine. So to overcome this, I'm going to either acquire the rentals with the 401k instead of the C-corp, or use the C-corp for acquisition and then transfer the asset to the 401k via tax-free contribution of stock shares. The rentals can then be held individually in shares of the C-corp stock. Only drawback here is that I can't touch the income without taking a distribution and penalty. So to overcome this issue I will simply increase my salary under the C-corp by the amount the 401k grows each month. Additionally, holding rentals in the C-corp is not out of the question since the impact of UDFI is minimal after depreciation come tax time. So to summarize and hopefully give some insight to the issues of rollover funding: use a ROBS if you're starting a business or buying a franchise and want to draw a salary. Also, if you're not planning on investing more than 50-100k it might not be worth it. Use a Solo 401k if you just want to do real estate, ie. flips, rentals, etc. Use the loan feature if you need cash. Use a SDIRA LLC if you want to be a passive investor and invest with an active investor. Hope some of this helps.
