Mega Backdoor Roth Solo 401k & Checkbook IRA

In this post you’ll learn how to get up to $120,000 into Roth retirement accounts (Mega Roth), annually. If you don’t already know the value and power of that – this is a must read. If you already know the value and power of Roth…you’ll read (devour) this without my saying so.

Roth 401(k)s & Roth IRAs: The value of Tax-Free Roth Money

If you invest in assets that generate high returns you know that Mr. Roth is your best friend. Unlike “traditional” tax deferred contributions to retirement accounts – for which you get a tax deduction up front, but pay your marginal income tax rate upon distribution – Roth contributions are taxable income in the year received, but grow completely tax-free thereafter. Tax-deferred vs. tax-free.

In addition, being that with Roth money the IRS receives their tithe up front, there are no required minimum distributions (RMDs) for Roth IRAs. This gives you complete flexibility with regard to those funds, allowing them to keep growing tax free and asset protected, indefinitely. Continue reading “Mega Backdoor Roth Solo 401k & Checkbook IRA”

Self-Directed Solo 401k Plans For Real Estate Professionals

Solo 401k retirement plans are the ideal tax advantaged account for real estate professionals. Solo Ks are incredible financial vehicles that are available only to those that meet certain criteria: (a) they have some self-employment income and (b) they do not have full-time employees.

For those that qualify, the Solo 401(k) provides the ability to invest their retirement funds in real estate, tax benefits on up to $120,000 per year, the ability to take loans from the retirement plan, and many other features. The SoloK can be used for every form of real estate equity and debt investment, including private lending, hard money lending, tax liens & deeds, notes….you get the idea. Of course, it’s not limited to real estate – it can be invested in nearly anything you can imagine.

With the Solo 401k you get total “checkbook control” because you’ll be the trustee, administrator, and beneficiary of your plan. There’s no requirement that a qualified custodian be involved.

Real estate professionals often have self-employment income and KNOW REAL ESTATE, making the Individual(K) the perfect plan. Self-employment income includes all earned income, regardless of whether the income comes from an LLC, corporation, sole proprietorship, or unincorporated entity. Continue reading “Self-Directed Solo 401k Plans For Real Estate Professionals”

Solo K Eligibility: Are Parents and Children Related? (From the perspective of the IRS, that is)

I’ve got a pal who whose got a great gig going. It’s a “side-business” that nets him about $120K a year. Prime candidate for an Individual K. He’s got lots of discretionary income to invest and needs to reduce his current taxable income. At his job (read: W-2) he gets to invest his 401k in loaded mutual funds to which he’s been reducing his contributions as he increases his allocation to real-estate and other alternatives. Sounds like a Solo K would be a great idea and absolutely necessary. Between him and his spouse they could sock away tens of thousands of dollars in their Solo K and invest tax free in real estate (remember no UDFI on leveraged real-estate in a 401k!). BUT, NOT SO FAST. Here’s the catch, my buddy’s W-2 comes from his Dad’s company, which has several hundred people on payroll and the IRS has got a tool known as the Controlled Group Rules which result in ownership of businesses being attributed  to relatives for tax purposes, potentially making a child’s qualified retirement plan subject to discrimination testing that includes a parent’s employees. Continue reading “Solo K Eligibility: Are Parents and Children Related? (From the perspective of the IRS, that is)”

Beyond Prohibited Transactions: The Step Transaction Doctrine

Mastery of the Prohibited Transaction Rules of IRC 4975 may lead the self-directed investor to contemplate some clever deal structures to work around those.

Suppose you own an income producing property that you’d like your Solo 401k or Checkbook IRA to purchase, but knowing that as a “disqualified person” you can’t transact with your IRA you initially conclude that it can’t be done. Suddenly, you experience an epiphany – you could transfer title to the property from your name (or your LLC’s name) to your brother’s name, and he would subsequently sell the property to the self-directed retirement account. Eureka!

That stroke of brilliance has been had by many others and the courts have developed some judicial doctrines to analyze and characterize such transactions. One such doctrine is known as the Step Transaction Rule. Continue reading “Beyond Prohibited Transactions: The Step Transaction Doctrine”

Beyond Prohibited Transactions: The Plan Asset Rule

All self-directed Solo 401k and checkbook-control IRA investors are aware (I hope that’s true) of the Prohibited Transaction Rules and Disqualified Persons discussed in IRC 4975. So, if you’re familiar with IRC 4975 are you covered?

The Plan Asset Rule

There’s a lesser known extension of IRC 4975 in the Code of Federal Regulations that discusses something known as the Plan Asset Rule. In a nutshell, the Plan Asset Rule says that when retirement plans own a “significant” share of an entity, all of that entity’s assets are treated as assets of the retirement plans for purposes of the prohibited transaction rules. The implications of this can be staggering; if retirement plans collectively own a significant portion of an entity, all the disqualified persons of all the retirement plan investors are disqualified persons to that entity. Continue reading “Beyond Prohibited Transactions: The Plan Asset Rule”

Beyond Prohibited Transactions: The DOL Interpretive Bulletin

Benefiting from tax-advantaged retirement funds before retirement age would be a beautiful thing, especially for those of that leverage the power of Solo 401(k)s and Checkbook IRAs. But, as that would defeat the intent of those accounts, the Prohibited Transaction Rules of IRC 4975 were created. Although written broadly, the innovative investor can contrive many ways to circumvent those rules.

However, beyond the letter of the law, the IRS has some additional tools at its disposal with which to counter creative strategies. Those include the Step Transaction Doctrine, the Exclusive Benefit Rule, and the Plan Asset Rule. For cases in which those rules may not apply, the IRS has the Department of Labor Interpretive Bulletin ERISA IB 75-2. Continue reading “Beyond Prohibited Transactions: The DOL Interpretive Bulletin”