Self-Direction Part 2 of 4



This is Part 2 of our 4-part series on self-direction. In our previous blog we covered retirement accounts generally. Here, we’ll cover how to make them self-directed.

NOTE: Self-direction is an advanced real estate investing technique with a lot of nuances. This blog is meant as general information and not legal, tax or investing advice. You will certainly need more education and advice to truly understand this amazing technique.

First, if you self-direct (we’ll call it “SD” from here on) an IRA, that account MUST sit at (be deposited with) an IRS-approved SD custodian. There is no way around this. So, your first step is to set up an account at a SD custodian. This is pretty easy, or even done online. You then either make a contribution and/or move (rollover) your current IRA money. Then, your IRA money is in place that will allow you to invest it in real estate immediately by “directing” the SD custodian to make an investment in your IRA’s name. This is usually a form to fill out, submit to the custodian that will then facilitate the transaction. SD custodians typically charge a yearly fee and transaction fees for each deal. You can lower these fees with an IRA, LLC (we’ll talk about that in a later blog).

What about 401Ks? Remember our discussion above about 401K retirement accounts—it requires a business to set up! Most real estate investors have an LLC or other entity that they use for investing. And if that entity is owned by you and/or your spouse, then that entity can set up a 401K “plan” for its owners and their spouses. In other words, your investing company establishes a plan for the owners (you and your spouse) of the company. This “plan” is called the Solo 401K Trust. This trust, then, acts as the “custodian” of your 401K money, so no need to hire and pay a SD custodian like with your IRA. Once you have the Solo 401K Trust plan, the trust gets a bank account and you rollover existing 401K funds or make new contributions.

Note: For both IRA and 401K contributions, there are RULES regarding how much, how and when to make the contribution. Please seek competent financial advice when making new contributions.

Once your retirement money is either at an IRA SD custodian’s account or in your Solo 401K Trust account, that money can be self-directed. As we mentioned with the IRA, the custodian will act as an intermediary with your investments unless you use an IRA, LLC. With a 401K Trust, YOU (as trustee of the trust) are the custodian, thus you can start making investments yourself.

Here’s a comparison of using IRA v 401Ks in self-direction. As you’ll see, if you can use a Solo 401K trust, it is more advantageous than self-directing an IRA.

Do you need a custodian? IRA = Yes, 401K = No

Who creates the account? IRA = You, 401K = a business (for the benefit of you)

Yearly contribution limits? IRA = smaller (<$6000), 401K = larger (can be > $50,000)

Prohibited Transactions (see, next blog)? Same for both

Prohibited Transaction Penalties (see, next blog)? IRA = bigger (could lose entire IRA), 401K = more easily fixed and smaller penalties

UBIT Tax (see, blog 4)? IRA = applies to both business income AND leveraged properties, 401K = only apples to business income

Now, there are rules and possible taxes when making these investments—Prohibited Transactions and the UBIT Tax. These will be the subject of our next 2 blogs.

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
(801) 560-2180


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