All Forum Posts by: Brian Eastman

@Andrew D. 

The question is not about whether real estate has tax advantages or not. At issue is that a Roth IRA is a fantastic wealth building tool. If you pull the funds from the Roth IRA early, you forsake years of tax free growth that IRA principal could be producing.

As I have said many times on BP, comparing after-tax real estate investing to investing in an IRA (Roth or Tax Deferred) is apples and oranges. The tax treatment of the IRA is what it is. The goal with an IRA is to invest it to achieve the maximum returns (while maintaining principal security). If the income from real estate investing grows your IRA better than the income from the stock market, and/ or is more secure, then real estate is a better investment for your IRA.

For someone who has piles of both tax sheltered retirement funds and after-tax capital, the question of whether to invest in real estate within an IRA takes on some merit as they look at diversification across their entire capital base, but that is not most investors.

@Dave Versch 

The self employment activity that you utilize to sponsor the 401k needs to be a legitimate, ongoing for profit activity.  Periodic software consulting would be fine.  You will want to have demonstrated income from the business that you file on a schedule C if you are a sole proprietor.  You can have years were there is no income, but definitely need to truly be "in business".

As for contributions there is no requirement to make them.

Our general opinion is that unless you live in a very high LLC fee state like California, or will definitely plan to use non-recourse mortgages in your investing, there is no great advantage to using the Solo 401k over an IRA if you are borderline on the self employment & contribution side of the equation. IRA's by their very nature have a certain permanence to them. A 401k is dependent on the continued existence of the qualifying owner-only business.

I see a lot of discussion on the Solo 401k that could be considered "shiny object syndrome".  Focus on what you need to achieve your goals.

To reiterate... you will not in all likelihood be able to make a well informed decision based on internet research and forums.  That can point you in the general direction and perhaps focus you on some key questions, but there is no substitute for a one-on-one consultation with an expert in the field (or more than one).

@Stacy E. 

While technically correct, your comment is potentially misleading to the general investor. What you are referring to is taking a non-taxable distribution of the Roth IRA principal - not investing with the Roth IRA. Once taken out of the IRA, the money is now your's personally and any income created will be taxable to you. Neither the principal or the earnings can be put back into the Roth IRA. This is not at all the same as using Roth IRA capital to invest in real estate and have the earnings accrue tax-free under the umbrella of the Roth IRA.

@Jim Ballatin 

You will definitely not go directly from the Fidelity IRA to ownership of property by the IRA. Fidelity cannot document this type of transaction. (Well the could, but they choose not to).

You would need to setup a self directed IRA to be able to invest in real estate with the IRA.

As @Tom Spaeth indicates, there is a lot to know before doing this. There is some good information on BP and the web as a whole, but really the best way to learn about the specifics of your situation is to speak with a self directed IRA professional.

Short story... the IRA really remains just the same with regards to tax rules, distributions, etc. The business model of the IRA is changed to be able to transact in real estate. You can, with an IRA LLC self administer the real estate projects of your IRA, but do need to keep everything very much at arm's length. We have thousands of clients who are investing their IRA's in real estate and feeling good about the real asset backing of their retirement savings and solid returns this type of investing can provide.

A self directed IRA is not a way to put investment capital in your hands, but rather just a different way to invest your retirement savings.

@Dave Versch 

Unless you are over age 59 1/2, you cannot draw any capital from a self directed IRA or 401(k), and then only by taking taxable distributions. These plans are for retirement investing only and there can be no direct or indirect benefit to you personally.

The decision between IRA and 401k hinges on a lot of factors specific to your situation, employment status, funding type, investment goals, etc. Speaking with a qualified advisor is the best means to make this determination.

You have to be self employed personally in order to establish a Solo 401k.  The investment activities you plan to engage in with the Solo 401k do not classify as that self employment.  For many people, a 401k is not an option, or if it is thanks to secondary self employment that is limited in nature - does allow for them to take advantage of the higher contribution limits - which must come from self employment income.

The key down-side of a Solo 401k is the need to maintain the qualifying status of being self employed with no full time employees. If this will not be a long term situation, then you might need to terminate the plan when you grow your business and add employees or shut down your business. Otherwise, yes, there are some advantages as compared to an IRA based program. What we find, however, is that a lot of folks do not really qualify, but have been swayed by their reading on the internet that the Solo 401k is the best things since sliced bread and really want to go that way. The best plan in the world is no good if it does not fit your situation.

If you are legitimately self employed and have a full time job with a 401k, your combined employee  contributions will be capped at $18,000 if you are under age 50 or $24,000 if you are 50 or older.  Employer profit sharing contributions and the plan maximum are not impacted by participation in two plans.

Both an IRA and 401k that are self directed are a fantastic way to diversify your investments into real estate and related non-traditional assets.

@Dave Versch 

There are two types of firms offering Checkbook IRA Plans:

1) Document providers, which are essentially just marketing the product and producing the documents and not really able to provide meaningful support.

2) True advisory firms that implement and support such plans, and can provide ongoing access to high quality guidance regarding plan administration and keeping your investment strategies within the IRS rules.

The price for the latter will typically be in the $1500-$2000 range, and considering the value over several years of investing is really quite a bargain.

You can "just get the docs" and perhaps even promises of support (from untrained call center staff) for $800-1200.  The savings is just not worth the sacrifice when you consider the risk of IRS penalties if you get it wrong.

@Chris Stromdahl 

An IRA absolutely does not provide a means for you to borrow from the plan personally. This is a feature commonly available with 401k plans. Perhaps you have a 401k and are calling it an IRA (very commonly done).

You can use a 401k loan to invest in real estate.  It is really two entirely separate things.  A) You personally borrow from the 401k and have to pay that back with interest.  B) You use the borrowed funds which are now essentially personal capital to invest.  

This is not "investing in real estate with your IRA or 401K", but rather investing personally in real estate with funds borrowed from your 401k. The tax consequences are entirely different and have been covered in many forums on BP.

@Val Csontos 

Generally speaking, an IRA LLC will not be subject to taxation.

Some states have franchise taxes that may apply, but these will generally be independent of income and in a fixed dollar range from about $175 - $800.

Some activities of an IRA (whether or not in a LLC) can incur trust taxes for the IRA itself, including:

The use of leverage creates exposure to Unrelated Debt Financed Income taxation (UDFI).  While this complicates things somewhat, you are still going to see a higher cash-on-cash return from the use of leverage than an all-cash purchase.

Engaging in a trade or business on a regular or repeated basis incurs Unrelated Business Taxable Income (UBTI). This would be things like flipping or wholesaling in the real estate realm. Passive investments such as rental income, notes interest, etc are not taxed in this manner. With the right deals - the bottom line ROI for your IRA may be significantly better even after exposure to UBTI than with other investments - so you pay the taxes and make your IRA fatter and move on.

@Val Csontos 

You are not entirely on target with your summary of the scenario. In an IRA LLC, the format is as follows:

1) Establish and maintain a self directed IRA account with a registered IRA custodian
2) Have that IRA document the IRA's ownership of the special purpose LLC

There are no transaction fees when you invest.  This is all done through the LLC entity and does not require 3rd party involvement

There is an ongoing relationship with the IRA custodian and minimal annual account fees as a result.

The IRA custodian does the annual filing of form 5498 with the IRS. This is not something that can be done independently by a CPA.

There may also be state registration fees or taxes for the LLC entity.

IRA custodians do not establish the LLC entity as they are prohibited by rule from providing legal services (they are a reporting layer for the IRA).

Find a reputable firm that can educate you on the process, implement the structure and provide you with guidance along the way as you invest.

This is a great way to diversify your retirement savings into real estate.

@Rick D.

The decision on which plan is right for you will be best answered by speaking with a professional in the field (or more than one), as well as your tax advisor. There are a lot of variables that go into this determination such as employment status, age, amount and type of capital to invest initially, investment goals, etc.

There are a handful of well qualified advisory firms that offer both self directed IRA LLC and Solo 401k programs and can objectively help you determine which is the better platform for your situation.