Your retirement plan, your way
We file the IRS-approved documents for your prototype self-directed 401(k) with In-plan Roth Rollover amendments, obtain Trust EINs from the IRS, and set up the plan with you (or the person of your choosing) as the trustee.CLICK HERE TO GET STARTED
What is a 401(k)
You and your 401(k) are not the same. Your 401(k) is a separate trust for your benefit when you retire. You, as the trustee, are allowed to direct the investments of the 401(k), and also take advantage of its IRS approved tax advantages as long as you have earned income from your business. You have full checkbook control over your 401(k) and a custodian is not required.
What can a 401(k) invest in
Many financial institutions claim that they allow you to self-direct your 401(k) investments, but then turn around and restrict what you can invest in. A 401(k) trust allows you unrestricted decision-making without the need for creating an LLC, unlike a self-directed IRA. Allowed investments include:
- Stocks, Bonds, Options
- Hard Loans & Receivables
- Tax Certificates
- Mobile Home Rentals
- Mortgage Pools
- Mutual Funds & ETFs
- Limited Liability Companies
- Life Insurance & Annuities
- Foreign Real Estate Rentals
- Private Notes & Loans
- Commercial Paper
- Private Stock Offerings
- Limited Partnerships
- Commercial & Residential Real Estate
- Trust Deeds & Mortgages
- Raw Land
What a 401(k) cannot invest in
It is very important to speak with your adviser or your tax professional regarding "Prohibited investments and Disqualified persons". These entities cannot ever engage with your 401(k) plan.
Prohibited investments in a 401(k) include:
- Artwork Rugs
- S -Corporation Stock
- Metal, gems, collectable coins
- (Unless an ESOP)
Disqualified persons include:
- The 401(k) holder and his or her spouse;
- The 401(k) holder’s lineal descendants and their spouses;
- Fiduciaries and investment advisers;
- Any corporation, partnership, trust or estate in which the 401(k) holder has a 50% or greater interest;
- Anyone providing services to the 401(k), such as a trustee, custodian, or adviser.
Investing your 401(k) in other businesses
Your Individual 401(k) can make loans to any type of business, albeit with some restrictions on loaning money to any business that you or any other disqualified person has a 5% or higher ownership interest in. You can invest in an existing business by purchasing stock as a loan to the business.
Investing your 401(k) in Real Estate
The plan is perfect for investing in real estate. It has a checking account, where checks are written to the title company and the purchased real estate is subsequently titled in the name of the plan. Rental income goes back into the 401(k), and you retain the tax-deferred or tax-free status of the investment. In addition, tax on unrelated debt financing for real estate purchases that use leverage, do not apply.
You can use other employer-sponsored 401(k) plan money as a down payment for a piece of real estate, then get a loan for the balance from your 401(k) Trust plan. The loan must be a non-recourse loan, meaning that if your 401(k) Trust fails to make payments, the only recourse the lender has is against the property itself. There are also tax ramifications, UDFI, unrelated debt financed income tax applies when you use your 401(k) Trust to get a mortgage. However, you increase your buying power when you use leverage.
Individual 401(k)s may purchase an undivided (and proportionate) interest in real estate with friends and non-disqualified persons. Vacation property can be purchased, however you (a disqualified person) cannot vacation there.
As trustee of your 401(k), you can locate the property, purchase the property, and manage the property via collecting rents, paying insurance, and maintenance services. A trustee cannot go in and “fix a faucet” because it would be considered “sweat equity,” and is disallowed by the IRS. Non-disqualified persons must be paid to make repairs, improvements, or renovations. Managing your investment property yourself will increase your rate of return and save thousands on management firm expenditures.
The 401(k) trust can make loans to other individuals who want to buy real estate, making for a great investment for the 401(k) because the loan is secured by tangible property. Real Estate developers look for private financing, and often pay above market interest rates, so loans are usually great investments for Individual 401(k)s
Funding Methods for a Roth 401(k)
You must declare and pay tax on your contributions when you file your annual tax return, but gains are tax-free and you must roll over your 401(k) to a Roth IRA by age 70½.
- Declare your personal contributions as Roth or “after tax” meaning the contribution has already been taxed and not tax-deductible as in a traditional plan. You simply write on the memo line of your contribution check “Roth”.
- Convert traditional funds already in the plan to Roth. This is very easy to accomplish and does not require a distribution. It will be an “in plan” conversion.
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- Creating an LLC under an S-Corp