[Editor's Note: The following guest post was submitted by Bernard Reisz, CPA, and founder of ReSure, LLC, and 401kCheckbook.com, companies that help their clients to invest their tax-sheltered funds in alternative assets. We have no financial relationship.]
Real estate is an attractive asset class for many reasons and should have a place in every diversified portfolio. There are many ways to obtain exposure to real estate, with varying risk, reward, and liquidity characteristics. In the past, real estate investments were most easily accessible through publicly-traded real estate investment trusts, or REITs, as well as non-traded REITs. In recent years there has been a considerable increase in real estate investment through other channels, especially syndications, crowdfunding, and direct real estate investment. While REIT investments may be accessible through a traditional brokerage account, the newer avenues of real estate investment are not.
Investing in Real Estate Through Tax-Advantaged Accounts
Increased interest in the real estate asset class has led many investors to ask if tax-advantaged accounts – IRAs, 401(k)s, HSAs, ESAs, and others – can invest in real estate via syndication, crowdfunding or direct investment. Investors are cognizant of the unavailability of such investments in their brokerage accounts, leading to the erroneous conclusion that regulated tax-advantaged accounts are precluded from pursuing illiquid investments.
The truth is that the Tax Code imposes few restrictions on the types of assets in which tax-advantaged accounts may invest in. As such, all retirement accounts can invest an array of alternative assets, including private lending, hard money lending, litigation finance, cryptocurrency, livestock, tax liens, and many others. Notwithstanding, the most popular application of the tax code’s “permissiveness” has been real estate investment, for which the most favorable vehicle is a Solo 401k Plan. A Solo 401k Plan is a Qualified Retirement Plan for small businesses that is exempt from many ERISA requirements. It is designed for businesses that have no full-time employees beyond the business owner(s) and spouse(s).
This article will address 15 key conceptual and practical aspects of Solo 401k Real Estate Investing, using the format of a Q&A with a representative Solo 401k Direct Real Estate Investor.
Q&A for Self-Directed Real Estate Investing
1) What kind of real estate investment did you pursue with your Solo 401k?
A: I made a direct real estate investment, meaning that I identified a specific property that met my investment criteria and bought the property using my 401k funds. I prefer direct real estate investment over REITs and other pooled vehicles because of the control and transparency it provides. I know my real estate market and work with knowledgeable real estate brokers to identify local opportunities that have little risk relative to their upside potential.
2) I’m considering using a Solo 401k for real estate investing. Are you confident that Solo 401k Direct Real Estate Investment is legal?
A: I am completely confident that Solo 401k Direct Real Estate Investment is legal, albeit there were several individuals that informed me otherwise. Generally, the tax code aims to be economically neutral, so that financial decisions will be made based on economic factors, not taxes. Therefore, the tax code stays away from favoring some asset classes over others. The only asset class that is disallowed to 401K Plans are collectibles, such as artwork, alcohol, rugs, gemstones; other than the limitation regarding the collectibles asset-class, the tax code imposes no asset-class restrictions on 401K investing.
3) How did you select a Solo 401k Provider to set-up your Solo 401K Plan?
A: There are many Solo 401k Providers, providing very distinct service offerings. It is imperative to understand the structure of the industry and the nature of the various service providers. Above all, it’s important to understand the scope of services that you may need, so that you can determine which service-provider can best help you meet your objectives. I selected a provider based on my unique profile.
4) Doesn’t a Solo 401k Provider address all my Solo 401k needs? What needs could I have that are outside the scope of services offered by a 401k provider?
A: At the most basic level, Solo 401k Providers provide the backbone of a tax-advantaged Qualified Plan – a Qualified Plan Document. However, there are several other items that need to be addressed both prior and subsequent to signing a plan document. Those are items related to Solo 401k Plan Qualification, Solo 401k Compliance, Solo 401k Operations, and Solo 401k Strategy.
Addressing these items requires knowledge of complex areas of taxation and personal finance, including controlled group rules, affiliated services group rules, prohibited transactions, UBIT, and many others. Some of those impact whether-or-not you actually qualify for a Solo 401k Plan!
5) What is a Solo 401k Provider? What distinguishes one from another?
There are several types of 401k providers:
(a) Brokerage House Solo 401K Providers
Brokerage houses, such as Fidelity, Schwab, E*TRADE, Vanguard and others offer Solo 401k Plans with varying tax features, but which do not allow for Direct Real Estate Investment. These providers generate revenue from the investments on their platform. Therefore, they provide a free Solo 401K plan, but require you to invest on their platform. They can’t advise on any tax matters.
(b) Self-Directed Custodian Solo 401K Providers
Self-Directed IRA Trust Companies and Administrators provide Solo 401k Plans with varying tax features, which do allow Direct Real Estate Investment. However, such plans require that the Solo 401k funds and assets be administered by the custodian. An important distinction between IRAs and 401(k)s, per the Tax Code, is that IRAs require a qualified custodian, but 401K Plans do not. Although a Solo 401k Custodian may add value, the use and cost of such a custodian is voluntary. These providers generate revenue from administering assets and processing transactions. They can’t advise on any tax matters.
(c) Independent Solo 401k Providers
Such providers will, generally, provide plans with the greatest flexibility and, of course, allow you to invest in real estate. Such Solo 401K Plans are referred to, in industry parlance, as Checkbook 401k Plans, because they allow you to keep investable 401k funds in a bank checking account that the plan participant directly controls. The “checkbook control” provided by these plans provides great flexibility, while reducing fees and streamlining 401k investment transactions. These providers generate revenue by providing 401k Plan Documents that provide broad flexibility with regard to plan investments and operations. They don’t custody assets or provide investments.
(d) CPA & Attorney Affiliated Solo 401K Providers
Such providers are similar to Independent 401K Providers but can go beyond just providing a Solo 401k document to advise on every aspect of a Solo 401K. These providers generate revenue by providing Solo 401K Plan documents, Solo 401K Filings (990-T, 1099-R, Forms 5500), and consulting on Solo 401K compliance.
6) So, what type of provider did you work with?
A: Thankfully, I identified a CPA & Attorney Affiliated Solo 401K Provider to work with. I’m a partner in a medical practice and have some income from a side-gig that I used to form my Solo 401k. I benefited from guidance regarding whether-or-not I qualify for a Solo 401k Plan, as ownership in the medical practice could disqualify my side-business from sponsoring a Solo 401k. In addition, I benefited from guidance about how to structure, and how-not-to-structure, my side gig for optimal tax treatment. As part of the Solo 401k formation process, I had a comprehensive Solo 401k operations consultation in which we discussed prohibited transactions, UBIT, plan operations, and record-keeping.
7) How did you fund your Solo 401k Plan?
A: I funded my Solo 401k with a combination of rollovers from IRA accounts and new contributions. The new contributions were based on the net income from my side gig (Note: Roth IRAs may not be rolled-over to a 401k Plan, even the plan allows for Roth 401k subaccounts). By consolidating retirement funds within the Solo 401k, I was able to pursue larger real estate deals.
8) Direct real estate investment benefits from leverage, borrowing money to finance larger deals. Were you able to do the same with your Solo 401k?
A: I did finance a portion of the deal, but it was not identical to financing a deal outside a 401k. Although my Solo 401k can borrow money to finance an investment, I can’t personally guarantee the loan – doing so would be a prohibited transaction. The solution was to get a loan that is non-recourse, meaning the bank can’t look to me to satisfy the debt with my personal assets, only to the investment property itself. The terms are not as favorable as with a traditional loan to compensate for the decreased risk to me and increased exposure of the bank. I was able to address all this with my Solo 401k provider during the plan set-up.
It’s noteworthy that a Solo 401k does NOT generate UDFI when using leverage to finance real estate investment. UDFI, which stands for Unrelated Debt Financed Income, is a type of income that is taxable to tax-exempt entities, such as charitable not-for-profit organizations and retirement plans. UDFI is, usually, generated when a tax-exempt entity uses borrowed funds to finance an investment. However, there is a special carve out that exempts Solo 401(k) plans from this tax when indebtedness is incurred for real estate acquisition.
9) What other differences were there when investing a Solo 401K into real estate?
A: The deal proceeds very much as it would with any other investment, only the assets are titled in the name of the 401k Plan. Likewise, all transactions are conducted in the name of the 401k Plan.
An option that my Solo 401k provider presented was having the Solo 401k invest in real estate through a solo 401k-LLC. They pointed out that if I were to purchase multiple properties, the 401k would benefit from the segregation of liabilities and that investment operations would be streamlined, as all could be conducted in the name of the LLC, a familiar business entity that is widely recognized. They emphasized that this was optional and for my first deal I chose to proceed without the LLC. When I purchase my next 401k real estate investment, I’ll put that one in a Solo 401k-LLC.
10) Did you have difficulty conducting transactions in the name of the 401k?
A: 401k real estate investing is a novelty to many people and it takes a few moments for them to adjust. Getting a bank account set up required educating the bankers about Solo 401k Plans. My provider assisted me with this and introduced me to some bankers that are knowledgeable about Solo 401k Plans.
11) Did your 401k property require any rehabbing and how’d you get that done?
A: The 401k property did require some rehabbing and upgrading. I hired some folks to do the work and paid them out of the 401k bank account. My Solo 401K provider cautioned against me actually doing any of the work myself – and I was more than glad to comply with that.
12) What are the limitations of Solo 401k real estate investing?
A: There are few “per se” limitations, but there are compliance matters that you must be cognizant of. My Solo 401k provider pointed those out to me before initiating the plan formation. Anybody considering using a Solo 401k Plan for direct real estate investment must be aware of Prohibited Transactions.
13) Prohibited Transactions! Sounds intimidating – what are those?
A: They sound prohibitive, but they really have a very limited impact on my real estate investment. Conceptually, the Prohibited Transaction rules are designed to preclude us from generating any personal current benefit from our Qualified Plans. Congress created 401(k)s and other qualified plans to incentivize us to save for our futures. Therefore, legislation was enacted to remove any conflicts-of-interest to maximizing the plan’s ROI.
The prohibited transaction rules don’t allow me and certain other disqualified persons to transact with my 401k plan. Of course, I can act on behalf of my plan in my capacity as plan trustee. It is only that I, as an individual representing myself, can’t be a party to a 401K transaction.
14) How has Self-Directed 401k real estate investing been working out for you?
A: It’s been working out very well. Each month, my 401k bank account receives rental income. The property is performing well and has appreciated since bought by my Solo 401K. The real estate has provided diversification and is outperforming (at least for the moment) my securities portfolio.
I always maintain a cash reserve in a 401k account. Any excess cash is available for further investment. My plan is to accumulate enough funds to purchase a second property with my 401K. In the interim, that excess cash is loaned to other real estate investors, a high return investment that is secured by real estate. This is known as secured private lending and is another form of real estate investment.
15) What advice would you provide to anybody contemplating Solo 401K real estate investment?
A: Successful real estate investing is very rewarding, but is far more demanding than the mouse clicks required to buy index funds. The outcome of my 401k real estate investment has been overwhelmingly positive and I’m confident that anybody that properly executes a 401k real estate plan can experience similar success.
What do you think about investing in real estate through your Individual 401(k)? Is it something you would consider? Why or why not? Comment below!
Not gonna lie, this sounds intimidating.
The two real questions with things like this are
(1) “Is the hassle worth the rewards?”
(2) “What’s the math look like comparing this complicated version of real estate investing to the normal kind with money that isn’t in a tax advantaged account?” In other words, how much money (i.e. tax) is being saved doing it the way the author describes compared to the way people normally do it.
It sounds like the author would say that it is worth it, but it certainly seems like a ton of hoops to jump through to invest in real estate. I am not a big real estate guy (yet), but – from what I understand – the tax code is already built in such a way that investing in real estate even outside of a tax advantaged account provides a lot of tax benefit.
I’d be interested to see the math behind how much money is saved doing it this way versus someone else who invests in real estate the “normal” way and has a good knowledge of the tax code.
TPP
I would agree this seems complex and also wonder about the benefits versus real estate outside a tax advantaged account. Would also wonder about fees for CPAs, attorneys, etc regarding such a set up. I tend to lean toward my investing being simple, having some previous businesses that were too time consuming. Interesting thinking outside the box though.
@Sportsdoc (Disclosure: I’m the post author)
Great questions. Regarding the complexity question, please see the lengthy response above to @The Physician Philosopher. The crux of it is, that while there’s some additional complexity, it is relatively minimal – but is amplified by the novelty of the approach. The savvy investor, that determines that this is a good fit for themselves, would just be integrating 2 financial strategies that would otherwise be implemented independently of each other: (1) Solo 401k Establishment and (2) Real Estate Investing.
With regard to real estate inside and outside of an i401k, please see the same prior response and the responses of @The White Coat Investor.
Regarding fees, this forum is probably not the place to post actual dollar amounts, so I’ll suffice with an overview.
– The fees for such services vary greatly among service providers.
– The level of service varies greatly among service providers.
– There is little correlation between the prior 2 items (i.e., pricing and services).
– Our approach is not to require bundling of services. There are very limited filing requirements associated with these plans; if your the kind of person that does your own taxes, your cost of maintaining such a plan is truly nominal (you’d be surprised at how truly inexpensive). But, we do handle the filings for those that want that level of service.
“Regarding fees, this forum is probably not the place to post actual dollar amounts, so I’ll suffice with an overview.”
I disagree. These forums tend to list the actual costs of services and interventions. Within reason the price should be in a certain range. Post the actual numbers otherwise it comes off sounding like spam. I might do it if its 2K. I will NOT do it for 50K. Post your prices.
@The Physician Philosopher (Disclosure: I’m the post Author)
All great points and questions, with varying degrees of validity, depending on investor profile. Overall, the purpose of the post is to educate about the ins-and-outs of Solo 401k Real Estate investing, enabling investors to make informed decisions. This is niche area of the financial industry in which misinformation abounds. The sources of such misinformation are (a) financial “salespeople” (stockbrokers aka “advisors”) that have a vested interest in discrediting Solo 401k real estate investing and (b) Solo 401k real estate service providers that have a vested interest in promoting such financial strategies. The former (will never inform their clients that Solo 401k real estate investing is an option and, if the possibility is mentioned by their clients, will say that investing a 401k in real estate is illegal and/or will exaggerate the complexities. The latter (some Real Estate Solo 401k Plan providers) will understate the complexities inherent to Solo 401k real estate investing, misleading their clients and prospects about the compliance obligations of such a plan and often providing such “Solo” plans to folks that don’t qualify for them – at grossly inflated prices. In any financial transaction, the rule remains “caveat emptor.”
We want anybody that comes us to be aware of the incredible possibilities of Checkbook Solo 401k Plans, as well as their inherent limitations.
To put your questions in context, note the following:
– Is the hassle worth the rewards?: The response to this is twofold. The preface to any response though is that it depends on the nature of the “hassle” and “rewards” – what is the hassle/rewards ratio? That will vary, based on each individuals investment options. (1) Although it seems intimidating to you, when broken into its components, it becomes evident that there is not much hassle at all. The process consists of (a) establishing an Individual 401k Plan and (b) investing in real estate. Setting up an i401k with an independent document provider can actually be far easier than setting one up through a brokerage. Investing in real estate using the Solo 401k. or Solo 401-LLC, is nearly identical to investing in your own name.
– Real estate inside a Solo 401k vs Real Estate outside a Solo 401k: Your point here is an excellent one and it will vary based on (a) investor tax profile and (b) real estate deal profile.
Real estate is often tax-efficient due to the ability to claim “paper losses.” This refers to the fact that, for tax purposes, your net income from a rental property is reduced by depreciation deductions; the neat thing about depreciation is that it’s a tax-deductible expense, but doesn’t cost any money out-of-pocket (oversimplified). However, real estate is not tax free and, in most instances, does present taxable income. To weigh whether-or-not to invest tax-sheltered funds requires analysis of the after-tax returns of all available investment options.
It is a general investment principal that tax-sheltered accounts are best utilized for tax-inefficient investments. For example, don’t put “munis” in an IRA/401k, rather put corporate bonds in an IRA/401k. Likewise, the ideal asset for a Checkbook 401k is private lending, mortgage notes, tax liens – which are real-estate secured investments that are tax inefficient and benefit immensely from tax-sheltering within a 401k or IRA. (Here’s a link to a post with more info: https://www.401kcheckbook.com/private-lending-iras-sdira-checkbook-retirement-account-advantage/).
There’s a limit to what could be included in a single blog post and all the info and questions are truly worthy of a separate posts.
@The Physician Philosopher (Disclosure: I’m the post Author)
All great points and questions, with varying degrees of validity, depending on investor profile. Overall, the purpose of the post is to educate about the ins-and-outs of Solo 401k Real Estate investing, enabling investors to make informed decisions. This is niche area of the financial industry in which misinformation abounds. The sources of such misinformation are (a) financial “salespeople” (stockbrokers aka “advisors”) that have a vested interest in discrediting Solo 401k real estate investing and (b) Solo 401k real estate service providers that have a vested interest in promoting such financial strategies. The former (will never inform their clients that Solo 401k real estate investing is an option and, if the possibility is mentioned by their clients, will say that investing a 401k in real estate is illegal and/or will exaggerate the complexities. The latter (some Real Estate Solo 401k Plan providers) will understate the complexities inherent to Solo 401k real estate investing, misleading their clients and prospects about the compliance obligations of such a plan and often providing such “Solo” plans to folks that don’t qualify for them – at grossly inflated prices. In any financial transaction, the rule remains “caveat emptor.”
We want anybody that comes us to be aware of the incredible possibilities of Checkbook Solo 401k Plans, as well as their inherent limitations.
To put your questions in context, note the following:
– Is the hassle worth the rewards?: The response to this is twofold. The preface to any response though is that it depends on the nature of the “hassle” and “rewards” – what is the hassle/rewards ratio? That will vary, based on each individuals investment options. (1) Although it seems intimidating to you, when broken into its components, it becomes evident that there is not much hassle at all. The process consists of (a) establishing an Individual 401k Plan and (b) investing in real estate. Setting up an i401k with an independent document provider can actually be far easier than setting one up through a brokerage. Investing in real estate using the Solo 401k. or Solo 401-LLC, is nearly identical to investing in your own name.
– Real estate inside a Solo 401k vs Real Estate outside a Solo 401k: Your point here is an excellent one and it will vary based on (a) investor tax profile and (b) real estate deal profile.
Real estate is often tax-efficient due to the ability to claim “paper losses.” This refers to the fact that, for tax purposes, your net income from a rental property is reduced by depreciation deductions; the neat thing about depreciation is that it’s a tax-deductible expense, but doesn’t cost any money out-of-pocket (oversimplified). However, real estate is not tax free and, in most instances, does present taxable income. To weigh whether-or-not to invest tax-sheltered funds requires analysis of the after-tax returns of all available investment options.
It is a general investment principal that tax-sheltered accounts are best utilized for tax-inefficient investments. For example, don’t put “munis” in an IRA/401k, rather put corporate bonds in an IRA/401k. Likewise, the ideal asset for a Checkbook 401k is private lending, mortgage notes, tax liens – which are real-estate secured investments that are tax inefficient and benefit immensely from tax-sheltering within a 401k or IRA. (Here’s a link to a post with more info: https://www.401kcheckbook.com/private-lending-iras-sdira-checkbook-retirement-account-advantage/).
Some questions to the sponsor of this post,
Does your plan documents allow for nondeductible employee after tax contributions to the 55k limit and in service rollovers? If so, are these funds kept separate from other contributions?
Are loan provisions available and who would administer and track loan repayments? Would a separate TPA need to be hired for record keeping?
If these accounts are maintained at a bank for check book control, how are the K1/1099 handled so they are non taxable. Would this result in more fees for tax reporting with a tax advisor?
@IR Doctor (Disclosure: I’m the post author)
Our plans do allow for (a) nondeductible after tax contributions to the 55k limit and (b) in-service rollovers (to the extent permissible by tax code). In addition, our plans allow for “In-Plan Roth Conversions,” which should be even more advantageous.
It seems you’d like to execute a Mega Backdoor Roth IRA Strategy. See: https://www.401kcheckbook.com/mega-backdoor-roth-solo-401k-checkbook-ira/
Loan docs and provisions are available in accordance with Tax Code and Regulations. See: https://www.401kcheckbook.com/solo-401k-loan-faq/
A separate TPA is not required. There’s no ADP or ACP annual testing. All you have to do is calculate your annual contribution limits. That’s something we can assist with, but is generally integrated with your overall tax-planning and filing, so is best handled with your CPA. We do provide the info you need to calculate your numbers, as well as an online contribution calculator (Note: Treat the online calculator as a close approximation, not a precise and accurate amount). See: https://www.401kcheckbook.com/checkbook-control-retirement-learning-center/solo-401k-contribution-calculator/
Are these features unique to your plan documents (ie. nondeductible after tax contributions to the 55k limit and in-service rollovers)?
(Disclosure: I’m the post author.)
Technically, any feature that is allowed by tax and labor law could be included in anyone’s plan documents. In practice, to get all the above features – loans, after-tax contributions, Roth contributions, in-plan conversions, in-service rollovers – a customized document is required as standardized documents provided by brokerages do not include these them. With our focus on Solo 401k Plans, our docs are designed for maximum flexibility and include all those features.
More work than the simple index funds and REITS? Yes.
Why consider it? In my opinion the best reason to consider it is diversification. One can argue that the long term returns are better than simple index funds, but I won’t even go down that route. More important is diversification in my opinion.
Imagine the following scenario incredibly simplified: A portfolio of 3 million dollars. For simplification lets say that all 3 million is in a simple VGTSX. The stock market has a bad year and dips 30%. Your porfolio now sits at about 2 million in just one year. Granted it will likely make it back in subsequent years, but what if this is your second year into retirement? Sequence of returns matters. Instead let’s take the same 3 million dollars and split it up into 2 million dollars into VGTSX and 1 million into real estate holdings in a self directed account described above. The same 30% stock market drop hits. You now have about 1.4 million in your VGTSX account but still have the 1 million in your real estate account which has actually been generating income revenue. The argument can be made that REITS would do something similar and be done in an easier fashion, however, I would only point to the 2007/2008 range for an example of how REITS might do in this future scenario. Income properties would likely take a hit in any down turn, it would not likely be as bad as REITS due to their correlation with the overall market.
The above is a lot of oversimplification, but I like the diversification factor and am currently using these accounts in a similar fashion.
My questions are the same as above:
1. Cost of Plan Document/Setup and recurring annual costs of maintenance and tax accounting vs benefit (Math) of holding Private Real Estate/Crowdfunding diversivication in a Tax Protected Solo 401(k) vs in the “Ordinary” Space. Would love to see numbers and have this modelled.
2. How would you set up the “checkbook” access and funding?
The checkbook isn’t a difficult issue. With a self-directed IRA the IRA owns an LLC, the LLC has a bank account, and the checks are written out of that bank account (and the rent checks are deposited into it). No biggie. I assume the 401(k) operates similarly.
Obviously I’ve given serious consideration to doing this. We have solo 401(k)s and we invest in real estate. My conclusion, however, has been that equity real estate is best held in a taxable account ASSUMING you can max out your tax protected accounts and still have enough going into taxable to have as much real estate as you want in your portfolio. By keeping it in taxable, you can do the classic depreciate, depreciated, depreciate, exchange, depreciate, depreciate, depreciate, exchange, depreciate, depreciated, depreciate die technique.
Debt real estate such as hard money loans, however, is incredibly tax-inefficient. 42% of what my hard money loans earn goes to the taxman. I think it could make a lot of sense to move that asset class into a self-directed IRA or 401(k).
If you are going to put equity real estate into a tax-protected account, better to use an i401(k) rather than an IRA of course, which is a really important point this post discusses.
Also, for someone who has all or most of their money in tax-protected accounts and wants to invest more in real estate, I think doing this is a better option than not funding those tax protected accounts to the max.
But you’re right that you’re exchanging hassle and fees for lower taxes and it may not always be a good exchange.
Thx Jim
(Disclosure: Post Author)
There’s a distinction between IRAs and Solo 401(k)s regarding “checkbook control.” Whereas IRAs are required by tax law to have a financial institution custodian, Qualified Plans do not. Therefore, only for an IRA does an investor requires an LLC to acheive Checkbook Control; the LLC serves as a vehicle to which the IRA financial institution custodian can send IRA funds. In contrast, with a Solo 401k no custodian is required, so the plan sponsor can have direct control over the funds as “Plan Trustee.”
We do use LLCs within 401k plans, but to achieve objectives other than “checkbook control,” such as (a) ease of transacting, (b) privacy, (c) asset protection, and (d) segregation of liabilities for those 401k plans that hold multiple assets. The Solo 401k-LLC is an optional feature that is available, but it is not required for purposes of checkbook control.
That’s convenient. Always nice to eliminate a layer of fees/hassle.
It’s worth noting that even on the IRA side, in which an LLC is required to obtain “checkbook control,” our clients generate substantial savings by having an LLC – not increased costs. There are multiple reasons for this (with variation among custodians, based on their fee structures): (a) Elimination of custodian “transaction fees,” including “expedite fees.” Expedite fees are fees incurred to get the custodian to process your transaction faster than they otherwise would (What are “expedite fees?’ When the investor doesn’t have checkbook control and the custodian processes each investment transaction, time is required for the custodian to do so and when that custodian’s standard processing times will result in missing the closing date for you real estate deal, you can pay an additional fee to expedite the process. Based on anecdotal evidence form our clients, expedite fees have accounted for a greater portion of their SDIRA fees than the standard transaction fees paid to their custodians.); (b) Elimination/reduction of custodian “asset-based fees:” Custodians charge either percentage-of-asset-value or flat-dollar-per-asset fees. Through the Checkbook IRA structure, assets are not held directly by the custodian, resulting in substantial fee reduction; (c) Getting the benefit of return on idle assets: Unlike liquid securities investments through brokerage custodians, investors in alternatives through SDIRA custodians may have substantial assets sitting in cash between deals with no easy way to invest them in liquid assets. Those funds sit at the custodian – with the custodian, NOT the account owner, earning interest on those funds. With a Checkbook IRA, the IRA-owner can easily invest in liquid securities at their discretion – whether that be an interest bearing checking account, money-market fund, stocks, bonds, mutual funds, etc. (d) Efficient, speedy investing, and getting the deal: In the alternative space, investments don’t happen at the click of a mouse. If funding an investment takes too long – your investment opportunity may just disappear. Having a custodian process each investment costs valuable time.
The foregoing is an overview of the kinds of substantial cost savings that may be realized though an IRA-LLC. This begs the question: How much for an Checkbook IRA? This can be very cost-effective, depending on the provider one uses to implement the structure.
Dr. Dahle, there have been requests on the forum for specifics about my firm’s pricing. Although it would appear to contravene the forum etiquette to post that, if you indicate that it’s OK, I’ll post a link to where such details can be found. It certainly isn’t a secret and is available on our website.
Excellent points about the benefits of the Checkbook/LLC.
Of course you can post prices when asked about it. The point the people asking are making is that your prices are too opaque. Like I tell the financial planners/asset managers, if readers can’t find your prices in 30 seconds on your site, it looks like you have something to hide.
The etiquette on the forum (and in the comments section) is that you can’t post anything primarily to solicit business. But understanding the fees at one firm helps people to know what the going rate is.
Agreed. Fees and services provided for comparison of apples to apples would be most helpful.
Thanks for the clarification.
Our current standard pricing, as of 12/17/18, for set-up of Checkbook 401k, Checkbook IRA, and Checkbook HSA is $975. For Checkbook 401k that’s the total set-up cost. For Checkbook IRAs, custodial fees will be due to the self-directed IRA custodian (as mentioned in a prior post: with a Checkbook IRA custodial fees can be nominal). Our set-up service is comprehensive and includes assistance with with IRA/HSA custodian selection, LLC domicile, bank account establishment (at NO time do we have access to your funds), educational session covering “prohibited transactions,”…
Annual plan maintenance fee for a Checkbook 401k, beginning on subsequent 12/31, is currently set at $150.
There is no required annual maintenance to 401kcheckbook.com for a Checkbook IRA/HSA, but the custodial fee is annual. There will likely be some annual maintenance cost related to the LLC, as well.
The fees ARE listed on the website at the very top of our web-based applications. All web-applications have been accessible through the “Get Started” page and through the “Services” drop-down. However, we’ll be taking this feedback to heart and making it accessible through additional pages. Thanks all!
Wait…wait…wait. Checkbook HSA? I wanna hear more about this. I read your site on it, but you’re the first person I’ve heard about that option from. Sounds like the LLC is required, $975 set-up fee, and then some vague ongoing fee. I’m curious how it would work if I were actually spending from the account each year and what you have seen your users invest in there. Are people really buying a property down the street with their HSA?
The value of an HSA is maximized when using it as a “Stealth IRA,” and not for medical expenses. This provides a longer-term investment horizon and decades of tax-deferred compounding. The Checkbook HSA is not nearly as popular as Checkbook IRA/401k because of a few factors: (1) Very few are aware of the option. This may be hard for WCI readers to believe, but for those that less financially informed, HSA for real estate investments is just so far off the radar: Do they know what a HDHP is? Can they comprehend that a high-deductible can benefit them financially (independent of HSA)? Do they know what an HSA is? Do they know how to use an HSA? Do they understand investing in alternatives? If everybody read WCI, they would be informed financial consumers. They wouldn’t necessarily opt to use an HSA for alternative investments, but they would have a solid grasp of their options and make informed decisions aligned with their goals. (2) HSAs are more limited for how much can be contributed to them, as the rollover options available to IRAs & 401(k)s are not available to HSA. Therefore, it takes some time to accumulate a sizable HSA.
In practice, the best uses of a Checkbook HSA for alternative investments are small private loans, crowdfunded investments, or partnering with other investors. It would not be prudent to use an HSA for an investment that may have a capital call that exceeds the capacity of an HSA.
About the “vague ongoing fees:” The precise dollar amount of ongoing cost will vary depending on the LLC domicile and custodial pricing structure – so an exact figure can’t be provided. For most of our clients, subsequent annual costs range from $125 – $450.
If anyone out tgere does this successfully, I would love to hear from them on this thread. Also interested in a vetted list of companies providing cost effective and flexible Solo 401(k) plans.
Everyone wants a vetted list of everything. The problem is vetting takes time, effort, and often money. So if you want to be paid for that vetting, you have to be making money to do it. Which of course introduces a conflict of interest (as the list is at least partially pay to play). It sounds simple (“I just want a vetted list”) until you’ve actually tried to put together vetted lists of financial service providers.
I have done this over the past 5 years though in self directed IRA, after the initial set up ( a couple of thousand for LLC setup and custodian etc), everything has been smooth, I bought a newer SFH for cash in another state, though remote for me but with a great contact (real estate person) in town who manages the property if needed for a small fee, it has worked well for now.
I use the Solo 401k to diversify my investments. I have a SFR, and several private lending loans. The loans produce interest, usually around 10%, and are usually for fix and flip contractors. The SFR produces monthly cash flow, (no mortgage) and has appreciated significantly over the 2 1/2 years of ownership. The loans are usually one year in duration, and have always paid off within that time frame. I have always been able to reinvest rather quickly into new loans.
I have found the Solo 401k to be an excellent entity to invest from. Once you learn the processes involved, it becomes rather easy. You just write a check, or wire funds to the borrower.
If someone is eligible to set-up this account, I highly recommend doing so.
How come you decided to put the SFR into the solo 401(k) instead of outside of it and just using the 401(k) for the debt investments?
When the opportunity to purchase the SFR presented, I had funds available in my 401k, and not in my taxable accounts. The SFR was purchased for appreciation in Northern California. When it is sold, it can be done without current tax issues related to capital gains. Granted, taxes will be due when funds are withdrawn from the 401k.
I do have a SFR outside the 401k, and benefit from the advantages of holding property in a taxable environment.
That makes sense.
Do you have debt and equity RE crowdfunding investments inside your Solo 401(k)?
Could there be a situation down the line where you will need to close the 401k plan, say if you sell your business? If so, what are your options? I am contemplating adding real estate investments, but have been told by my administrator that if I were to close the plan in the future, the assets would need to be rolled over into a custodial IRA, which may have significant management fees.
Disclosure: I’m the post author.
All distributions can be done either (a) in cash or (b) in-kind. In an in-kind distribution the asset is distributed as is. However, in-kind distributions can get to be cumbersome when navigating taxable distributions, such as RMDs. For non-taxable rollovers, such as to an IRA, in-kind rollovers can work well. In practice, the WCI’s recommendations about using cash in the account for RMDs is the most straightforward approach. The topic is addressed in the following page: https://www.401kcheckbook.com/buy-retirement-home-retirement-funds-sdiras-ira-llcs-solo-401k-plans/
What about RMDs? Forced to liquidate or pay penalty?
Ideally they can be paid from income on the investment, but you may need to keep a more liquid investment or even enough cash in there in order to meet that requirement. Obviously something to incorporate in your plan.
I’m curious how often you would have to reappraise the real estate once you go to the point that you’re taking out RMDs. Obviously a farm or commercial real estate won’t just mark to market on its own every year.
Good question. I’d like to know the answer too.
(Disclosure: Post Author)
That’s an excellent question.
It’s important to distinguish between 2 types of valuations: (a) valuations that impact tax-liability and (b) valuations that don’t impact tax liability.
Form 5500 annual reporting falls into the latter category (in non-RMD years), while RMD calculations fall into the former category.
Naturally, when the valuation impacts tax-liability, it’s importance – and corresponding level of rigorousness – is much greater.
For real estate assets, valuation can be obtained by working with a real estate agent (e.g., getting a “brokers price opinion,” or “BPO”) or a real estate appraiser.
One of the features that make a Solo 401k attractive for investing in alternatives is that, until RMDs are required, annual valuation does not impact tax liability. In contrast, annual valuation for Defined Benefit Plans is of great import.
If one is required to file the 5500 form, how do you determine the value of real estate assets every year?
That’s a great question to which a more verbose response was provided above in this thread. The short answer is by using “comps.” Ideally, one would work with a licensed real estate agent or real estate appraiser.
Thanks for your reply.
Seems like a lot of trouble to go through this yearly for the 5500 form. You did mention that the yearly valuation doesn’t impact tax liability, but how much of a “guesstimate” is acceptable?
Also if one holds assets in syndicated real estate (especially if they are funds), its less clear to me how to get comps.
Why are you creating a 401k Solo? I own a beach condo as part of my regular office 401k. It was purchased with funds from the 401k and has no mortgage. I have a property management firm that rents it for vacation use and pays all bills and property taxes
Most standard 401(k) plans can’t handle this stuff. Sounds like you have a custom plan that can, just like a doc who gets a custom plan for an individual 401(k). Imagine a doc whose 401(k) is through a hospital. That one isn’t going to allow you to buy a beach condo.
Our office has it’s own plan with three partners and 40 employees. The accounting firm we use was able to allow an individual partner buy property in the name of the plan and keep track of it
Cool feature.
So the solo “self-directed” 401k plan works great for many folks. You can save a large amount of money, reduce your overall tax liability, and still have control of your assets so they can be used for real estate activities. Each and every person has different goals and needs. These work great for the right person who wants to control their money.
I have several self-directed IRA’s. I now need to complete IRS Form 990-T due to UBTI on a K-1 in each account. The custodian has put the responsibility on me, which is fine, but I am having a hard time finding decent instructions on where to put the limited numbers on my K-1 into the plethora of spaces found on the 990-T. Does anyone know of a resource that would explain how to complete the 990-T from a fairly simple K-1 for a hotel investment? In other words, where do I put the numbers from my K-1 into the 990-T. Is it as simple as filling in lines 32-34 and going from there? I don’t think the IRS instructions are very helpful.
I don’t know of an easy resource. Obviously you could hire it out, which might be well worth the money if you are truly a “Dr. Bone.” This is one reason why I avoid owning equity real estate in retirement accounts.
Did you decide to place your DLP access fund investment inside a retirement account? I decided to skip the hassle for now and just used taxable funds for my Cityvest DLP access fund investment, but I know this is very tax-inefficient and if I decide to do hard money loans again in the future I’ll consider setting up a self-directed 401k (current solo 401k is with Fidelity).
Also in taxable and I agree, it’s not ideal. I agree that I’ll likely eventually have my hard money loans in a tax protected account, probably my new self-directed solo 401(k).
Recently opened a self directed solo 401k with Fidelity as well but I noticed they wont allow wire transfers out. I was planning on investing in private placement debt or equity. Anyone experienced this as well or have a work around?
Also, does anyone know of a good calculator to figure out voluntary after contributions if one is also contributing to a W2 401k at work. Goal would be to fund to the 56k limit.
I have checkbooks that I would use in that situation.
After-tax? It’s basically your entire income you can contribute. What’s to calculate?
I guess I should clarify. 401k at work of which I fund to the limit at 19k and employer contributes another 11k that they cap.
Solo 401k for 1099 income I generate from consulting and moonlighting. If I generate a hypothetical 100k of 1099, how much of that can I contribute as employee after tax deferral.
$56K.
(Disclosure: Post Author)
@IR Doctor
Gross contribution limits are applied on a “per plan” basis – assuming they are truly 2 plans of unrelated employers. However, employee deferral contributions are aggregated across plans. In addition, in calculating Solo 401k contributions limits you have to account for self-employment taxes, which are impacted by amounts withheld on your W2 job.
The following links should provide context and answers:
– 2018 Calculator: https://www.401kcheckbook.com/checkbook-control-retirement-learning-center/solo-401k-contribution-calculator/
– 2019 Calculator: https://www.401kcheckbook.com/checkbook-control-retirement-learning-center/solo-401k-contribution-calculator-2019/
– Finance Buff’s calculator for “side-hustlers:” https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
– Solo 401k Contributions – Understanding & Optimizing: https://www.401kcheckbook.com/solo-401k-contributions-guide-2018-2019/
– Intro to Defined Contribution Plans: https://www.401kcheckbook.com/checkbook-control-retirement-learning-center/defined-contribution-plans/
Hi,
Thanks for the post on Solo 401K. Im still looking for a provider where you can invest in real estate and the same plan has a self-brokerage piece.
However, Im posting because I just read something that I have not seen mentioned elsewhere and I didnt see it in this article. You MUST take RMD’s from your ROTH solo 401k funds?
Granted it wont be taxed but still, that’s why I want a ROTH. I dont want to have to take money out of a portfolio, that I may not need.
What happens if you have real estate in your ROTH portion of your Solo 401k and you turn 72. You have to transfer those assets as a like kind roll over, to a typical ROTH IRA?
I realize this post is old. However, hope someone is still monitoring.
Thank you for your help,
Roberta
Yes. Roth 401ks have RMDs. But you can just roll them into a Roth IRA at 72 to avoid them. No biggie. Here are folks who can help with the self directed accounts:
https://www.whitecoatinvestor.com/retirementaccounts/
What are full TPA services vs Custom Plan Provider services, and who are actual examples of TPAs? Do any TPA’s allow real estate investing?
This post keeps mentioning find a “real” TPA but it seems difficult to find out what that exactly means.
https://www.bogleheads.org/forum/search.php?keywords=Spirit+Rider&t=292833&sf=msgonly
Please give examples of real TPA’s and TPA responsibilities that go above companies like MySolo401k.net, IRAFinancialGroup.com and ascensus.com (and the OP’s company, although responses from the OP are welcome!)
I just want to know what I would be getting into if all I have are plan documents, what exactly am I doing to lend money in a hard money loan/private money deal in real estate, or what I need to document in everyday investments. Thank you!
When we went from a solo 401k to a 401k with employees this last year, we got a “real TPA”. Mysolo401k.net was doing our solo 401k but could no longer handle our situation now that we had employees. If you need a real TPA (and this is a controversial topic for those with a solo 401k but not a 401k with employees), people who can help you are listed here: https://www.whitecoatinvestor.com/retirementaccounts/
Glad to clarify.
401k implementation, management, compliance, and strategy sits at the crossroads of multiple areas of expertise and regulation. The levels of required expertise will vary based on your “plan profile.”
Solo 401k plans (“non ERISA”) are primarily governed by IRS regulation. Full 401k plans (ERISA plan covering non-owner employees) in addition to vastly expanded IRS regulation must also contend with DOL regulation.
RELATIVE to ERISA plan compliance, Solo 401k compliance is a “piece of cake.” Note the emphasis on the word “relative.”
Solo 401k compliance, viewed objectively, is quite complex. However, the RELATIVE compliance simplicity has resulted in Solo 401k services that consist of providing a IRS-approved 401k plan document, with no meaningful compliance support.
In contrast, true TPAs cater to the ERISA plan market and provide robust compliance support. It is true that much of that compliance support is focused on non-discrimination testing, vesting, etc – but as a result of the TPA services you can be fairly confident that most plan compliance matters are addressed, including the compliance area that overlap with Solo 401k.
As (a) TPAs focused on the ERISA market and (b) brokerage houses (Schwab, TD, Vanguard, etc.) provided free Solo 401k docs, a gaping void in Solo 401k compliance has emerged.
Solo 401k compliance issues can be broken into 2 categories: (1) Issues that must be addressed at implementation and (2) plan operational & income tax compliance.
Once alternative investments are introduced to the mix, especially for ERISA plans, you enter a space in which there are very few providers that can cover all your bases. In my experience, full service TPAs do not have the full ERISA or Tax Code expertise to integrate alternative investments. While some true TPAs will administer plans with private assets, that does not guarantee compliance. Most expert TPAs do view alternative assets in ERISA plans as not worth the hassle and risk.