How to use your Retirement Account for Real Estate and more!

by | May 2, 2020 | Investments, Real Estate, Retirement

As a real estate investor for well over 10 years I can unequivocally say that the best thing I’ve done for myself is setup a custodian-free Solo401K account (also called QRP, eQRP and other confusing names but they all boil down to the same fundamental thing).  A Solo 401K is an individual 401(k) designed for a business owner with no employees. In fact, IRS rules say you can’t contribute to a solo 401(k) if you have full-time employees, though you can use the plan to cover both you and your spouse.   


Am I eligible to set up Solo401K?

A lot of investors who have W-2 jobs and are full-time employees always think they cannot set up a Solo401K and I can tell you with certainty that you can! All you need is a small earned income business to set one up. The business can be a eBay Store, your small coaching business, an Etsy store or a small consulting business that you have as a side gig. How much money you make from this business has no bearing on whether you can setup a Solo 401K. It just needs to be an active income business and not a passive income entity. For example if you have a small business which rents homes then it is generally a passive income business. However if you’re actively managing your rental as a landlord you can set it up so you’re the property manager and you get “paid” a fee for managing your own rentals in which case you’ve setup an active income business. 


Contributions vs Rollovers

One of the big advantages of a Solo 401K is the large contribution limit it provides. If you have a business that is making considerable revenue, you can contribute up to $56,000 pre-tax dollars from your business income towards your Solo 401K if you’re under 50, if over 50 you can put in an extra $6000 in catch-up contributions bringing you to $62,000 pre-tax dollars that you can shield from Uncle Sam! That’s $56K-$60K you can tuck away each year which is way larger than an IRA or any typical employer 401K will allow you to contribute. However your business has to be making more income than that to take advantage of contributions.

If you have a small business and you’re only generating $2K or even $200 a year, fret not my friend, you will just use your Solo401K as a rollover account. You can use it to rollover previous employer 401Ks and/or Traditional IRAs you might have open, to a single Solo401K to consolidate them and use them for investments. This is especially true if you have been with a few employers in the past and have a few 401Ks floating around with your previous employers that are not being invested well or are just exposed to the stock market and not much else, thanks to a Fidelity or Vanguard account that offers a restricted choice of investing options to you.

Your Solo401K will open up the world of investments to you – Cryptocurrency, Notes, Tax Liens, Rental Properties, Passive Multifamily Investments and more!


Investments in your Retirement Account

Let’s face it there are better investments than the volatile stock market right now. The stock market is not the best way to make those ideal 10% average returns and in fact, with the ups and downs and uncertainty we see, you are more likely to lose money unless you’re day trading in the stock market. The ideal returns in the stock market comes when investors don’t panic and pull out of the market during the crashes and hold over long periods of time (think 20+ years). Studies have shown that an average investor makes a measly 3.69% IRR (Internal Rate of Return) in the stock market (equities, mutual funds, ETFs etc) versus the touted Wall Street 8-10% returns. In contrast, real estate provides a better hedge with tangible assets and double-digit returns. Real estate prices also don’t fluctuate day to day unlike the stock market and thereby offer a stable retirement account investment option. Outside of retirement accounts, depreciation also helps provide for a tax-free passive income stream with real estate investments. To learn more investing in real estate to generate truly passive double digit returns, check out our Learn page and setup a call with us!


Control, Control, Control

I’m admittedly a control freak and this appeals to me the most about Solo401K. The biggest advantage of a Self Directed Solo401K account is that allows you 100% control of your retirement account unlike Self Directed IRAs which are still custodian-controlled. Of course you still have to avoid prohibited transactions per IRS regulations. Prohibited transactions broadly include – real estate for personal use (or your family/relatives use), coins and some antiques/collectibles. Custodians in IRA can cause delays in funding and drag their feet. You don’t have to deal with that anymore when you have checkbook control. Investing from your retirement is now as simple as cutting out a check! Or wiring funds to your target account!


UBIT Begone!  

Another big advantage of Solo 401K over Self Directed IRA is the avoidance of UBIT – Unrelated Business Income Tax! 

Yes! Your retirement account can be taxed!

Ugh! I didn’t know that when I setup an SDIRA and invested passively into Multifamily Real estate. UBIT is a tax that is charged within some retirement accounts like IRAs on leveraged transactions. 

What that means is that say you invest $100K into an apartment investment that places a debt of 70% Loan to Value. 30% of the apartment investment is coming from investors such as yourself and 70% from a lender who’s loaning on the property. Let’s say you double your investment in this apartment. Technically of the $200K you would expect to receive 70% of the $100K in profit from the mortgage taken and hence this $70K is taxable to the tune of 37%! 

Oops! Yes! UBIT tax is that HIGH! That can eat into your profits really quick as you might imagine! So how do you make a retirement account investment that you can skip paying UBIT?  

Solo401K is the answer! UBIT Begone!


Lower Maintenance Fees in a Solo401K

Typically IRA custodians charge per asset in an SDIRA and most time that can add up quickly based on the number of investments you carry and the dollar amount of these investments. In contrast the annual maintenance fees on Solo401Ks are minimal and range between $199-$499 in most cases. Having flat fixed costs helps you avoid them from cutting into your returns.

Personally, I moved all my investments from my Self Directed-IRA to my Solo401K and this has given me 100% checkbook control of my retirement account. I love real estate and think it’s a great long-term investment for a retirement account that is strong and stable when you choose good properties in solid locations. I invest passively in real estate through my Solo 401K (Multifamily, Hotels, Tax liens you name it). You could buy an investment property through your Solo401K as well as long as the profits after expenses are going back to your retirement account as well. I tend to use it more for passive investments personally than buying single family rentals although that’s a perfectly acceptable use.

I recently hosted a webinar on using Retirement Accounts for investing that might be useful for folks trying to navigate the different options for setting up a Self Directed Solo 401K account. You can view the recording here that might be helpful for you to compare the different options.  

Options to Setup a Solo401K

As a financial educator, I like to present my investors with various options that I’m aware of and let them make their own choices based on their personal needs and preferences – cost, convenience and other factors usually weigh in here. There’s no ONE right tool that’s a good fit for everyone. I will however pitch in my experience and help them make an educated decision.

I have personally used to setup my Solo401K and had less than a favorable experience doing it. It took me 4+ months and I felt like I was on my own trying to navigate the waters and set things up. It was a long arduous process especially to retitle my existing SDIRA assets and finally get them to my Solo 401K. I would not recommend them.  

Depending on how much work they want to do and how much they expect to be handheld through the setup, ongoing support and management of the account besides moving of existing assets in their current retirement account(s) I have had my investors use one of these two options successfully –

1)  Rocket Dollar – Low-cost, a-okay customer support, not much 1-1 or hand-holding, easy setup, low yearly maintenance, good company overall to deal with. If you have existing real estate assets in an SDIRA to move over you are on your own and have to figure out how to retitle those assets and move them from over. If you’re however just rolling over cash from your existing retirement account to a Solo401K then it’s a great low-cost easy option to use!   

Check out this link for a FREE book “The Rocket Dollar Guide for Self-Directed Retirement Plans”. The page also has lots of information on retirement accounts that’s useful and Rocket Dollar itself.  You can signup for a Solo401K account here (I do recommend the higher cost plan because it offers check writing capabilities which you want to have!) 

Disclaimer- They provided me $50 off with code “CHERRY STREET” but I haven’t tested it recently to see if it still works! So feel free to try that out for a discount.  

 2) eQRP  Higher setup cost, higher yearly fees, awesome customer support, lots of 1-1 and handholding, will help you with real estate asset transfer to your new eQRP account which is really a Solo401K with asset protection and additional bells and whistles which might be very important for some investors. I’ve sent a lot of investors to this company because of their excellent customer service and fast setup especially when we are looking to move quickly and when the investor wants a no-hassle “please handle it for me” experience because they simply don’t want to deal with it and would rather pay the $$$ in exchange for a smooth setup. A Solo401K setup invariably involves MORE work when there are existing asset transfers/retitling involved. Depending on the number of assets and if you involve an attorney the cost can significantly go up. This company provides a better experience for such investors and avoids expensive attorneys and provides a one-stop-shop experience.. 

 If you’d like to get a FREE book offers you can check out this link.


CARES Act and Retirement Disbursements/Loans

Last but not least, you should definitely look into the retirement account changes in the CARES Act which allows you to take upto $200K from your retirement account penalty and tax-free upto 2023*. You can check out this link and a recent webinar I hosted on this topic for more info. $100K of this can come out as a disbursement and upto 100K as a loan and they have different timelines for payback or taxation if you decide not to payback. The big advantage of this is that you can generate money outside of your retirement account right now with this withdrawal or loan while paying no penalties as long as you have it wisely invested in a high-yield low-risk investment. This CARES Act Provision expires Dec 31st, 2020 after which you will not be able to take advantage of this awesome benefit. This is especially useful for business owners that might be affected by COVID or if you’re a investor just looking to create income for yourself right now and not quite at retirement age yet. You can check out this blog I wrote a few days ago for info on this provision of the CARES Act- How to get upto $200K out of your Retirement Account(s) NOW!

As always, stay safe my friends! Take advantage of this slow-season in your businesses and/or jobs to learn more and take advantage of the opportunities which are ahead of us after this crisis blows over!