Financial Freedom

How to Use a Self-Directed IRA or Solo 401(k)


Today, it’s no secret that most baby boomers are now playing ‘catch-up’ with their retirement funding. In just two generations, the career world has been completely transformed. Lifetime employment at a single employer with a gold watch and a guaranteed pension at the end is now a relic of the past. Moreover, once ‘un-touchable’ social security trust funds have been routinely invaded by heavy Congressional borrowing for decades. It’s not uncommon today for people to change jobs, homes or locations every few years. Most now realize they have primarily responsibility for the size of their retirement income. But at the same time, with longer life expectancy, improved health care and better lifestyle choices, most adults know that inflation will decrease the purchasing power of social security benefits. However, many have relied solely on the Social Security as their sole means of saving for retirement. They now know that will mean living in poverty during their retirement years.


If you are a part-time or full-time investor or are a business owner, you have the best chance of controlling the size and the timing of your retirement. The better options are yours if you first establish a corporation, a limited liability company or a limited partnership that you manage. Under improved legislation, the dollar limits on contributions have gone up and the range of investment choices expanded. So why pay someone to manage your retirement and ‘hope for the best’ in the stock market when you can directly control your own retirement destiny? Investing in assets you know and understand provides a way to limit your downside risk and may give you better control of the outcomes. Plus profits in the IRA are free of capital gains taxes so the total dollar value of your IRA can grow much faster over the years.


With a Self-Directed IRA or Self-Directed 401(k), you act as your own investment manager. Besides the usual choices of stocks, bonds, mutual funds, options, etc. you can now invest in a wider range of non-traditional assets including:

o Real Estate Investment Property

o Mortgages and Deeds of Trust

o Tax Liens Certificates

o Promissory Notes / Commercial Paper

o Private Stock Offerings

o Real Estate Lease / Options

o Limited Liability Companies

o Limited Partnerships

o Business Equipment Leasing

o Structured Settlements

o Mobile Homes Rentals

o Foreign Currency Exchanges

o Accounts Receivable Factoring

o Secured and Unsecured Notes


Today, real estate investors can take full advantage of small business retirement plans. These are just as easy to set up as the traditional or Roth IRAs but allow individuals to contribute considerably more than the allowances for those plans. The small business retirement plans include the SEP (Simplified Employee Pension Plan) IRA, the SIMPLE (Savings Incentive Match Plan for Employees) and the Solo 401(k) Plans. For example, there are two components in maximizing the Solo 401(k) plan: (1) An employee salary deferral contribution up to $15,000 (not to exceed 100% of pay); and (2) An employer profit-sharing contribution with a limit up to 25% of pay (20% for self-employed). The total contribution from both sources is $44,000 but with a ‘catch up’ provision for individuals age 50+ who can contribute another $5,000 for a $49,000 annual contribution.


To maintain the tax-advantages of your Self-Directed Retirement Account, you need to avoid what the IRS calls ‘Prohibited Transactions’ (which are basically self-dealing type of transactions). These include selling personal property to your IRA; using your IRA as security for a loan; borrowing money from your own IRA; purchasing property for personal use with IRA funds (must be for investment purposes only); using IRA funds purchase collectibles such as artwork, antiques etc. (although certain U.S. minted coins might be exceptions); purchasing assets owned by yourself or your spouse with IRA funds; and having your business located in a property owned by your IRA.


Self-Directed IRAs and Solo 401(k) plans can (for liability protection) become ‘members’ of a Limited Liability Company (‘LLC’). While not required, it is the ‘smarter way to go’ in preserving value and reducing liability risks – no matter what state you’re in. In fact, your Self-Directed IRA or Self-Directed Solo 401(k) can become an LLC member alongside the accounts of other co-investors and together combine your IRAs for greater investment results. The LLC Operating Agreement for Self-Directed Retirement Accounts is different than other LLCs and provides a specific framework in which to operate the Investment LLC as your Self-Directed Retirement Account so that everything is ready for investing at about the same time.


After months of looking at different providers, I found that for simplicity, ease-of-use and online 24/7 access with downloadable forms and instructions, Equity Trust Company (in Ohio) was one of the most helpful Self-Directed IRA or Self-Directed Solo 401(k) Plan custodians. They are the originators and they will hold your hand as you learn the ropes. There are certainly others who are capable, but I found Equity Trust Company to be among the most ‘user-friendly’. My contact there is Mr. Tim Debronsky, whose e-mail address is [email protected]. Tim’s direct phone number is (440) 323-5491 (ext 329). Early in the conversation ask Tim to send you the ‘real estate investor package’.


Source by Michael Potter, J.D.

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