We hope this will be one of the single most useful sites, and particularly this page, in helping you decide what account is best for your goals. We create IRA and Solo 401(k) plans with full self-directed abilities with (or without) checkbook control for our clients. We offer the largest range of account types in the arena so that you can be confident that we’ll recommend what is best for you; no matter what that is.
The best place to start is to write down the following:
- How many different investments am I going to make?
- How much time can I spend growing my account?
- How much money do I have to work with?
How many different investments am I going to make?
We provide our clients ongoing access to an ever changing and growing list of investments and channels that offer both high returns and safety of principal – some of which require checkbook control – but most of which just need a basic account. There are lots of other options as well. A broader sample list can be found in our FAQ.
A few general rules: If you are buying tax liens (or deeds), real estate options, or properties themselves, you’ll do much better with checkbook control. If you are thinking about buying and holding a TIC or having managed currency accounts, a basic account will be best.
Quick, high interaction investments such as “hard money” loans, livestock purchase, auto auctions, and more require checkbook control. Slower paced, passive investments like a TIC or a single longer term loan to a developer usually need only a basic account. The more investments you have or make in a year, the more checkbook control makes sense. If you just have a couple totally hands-off investments, then a basic account could save you money.
How much time can I spend growing my account?
How much time you can devote is another key consideration. We have some retiree clients who work their account like a hobby in their spare time… that kind of activity virtually screams ‘checkbook control’. Other investors have only one, maybe two, alternatives they’d like to participate in and otherwise will not be thinking about the account much at all. Here a basic account is most cost effective. If an investor is going to be actively using their time and energy to find and act on investments the checkbook account is best (by an order of magnitude). If the investor has one or two passive items they want to buy and hold for the coming years the basic approach usually wins.
How much money do I have to work with?
The final consideration is how much money you have to work with. It is not clear cut however… what this number means is closely related to how you answered the last question. If you have the time, it doesn’t take much money to make the checkbook account by far the better value. If you don’t have the time, then you need to have a much larger account before the checkbook approach has merit. Please review the examples below for a better picture of what we mean.
Examples: A Basic Account, or a Checkbook One?
Sarah has $40,000 in her IRA account, a full-time job and three kids. Sarah wants to be involved in something other than the stock market with part of her funds… what should she do? Well, spare time is off the list, and she definitely needs to be able to have her dollars work hard. With the amount involved, let’s say she wants to leave 1/2 in some mutual funds, and to be involved in some way with a local developer. She can loan the developer money at a fixed rate of return, with a small bonus when he sells a house… If that is all true, she should get a basic account and call it good.
What if she has the desire to put some hours into it? Perhaps instead of working a couple hours a week for income, she can work a couple hours a week to improve her retirement? She could option a couple lots, place ads, list them, and get them sold. Maybe she has a friend who is very good with horses, and could possibly make her much more than if she loaned the money. In this case, she should get a checkbook account as she has the time to make use of its advantages, even though the amount she’ll be working with isn’t large.
Scott and Julie have $210,000 between them in their old 401k plans and a couple of IRAs. They also have near zero time to do anything. If that is the case, managed accounts will be what serve them best, and that leans toward a basic account.
The tipping point for the checkbook control account is how many different managed accounts they have. If they had three that were not part of “the norm” …say they had a secure options program, a currency trading account, and they loaned the rest out as hard money; now what? The custodial costs on the three “alternative investments” would be around $400-$800 a year, give or take (double that if they each have three alternative investments in their IRAs). If they had the checkbook style account the custodial or administrative charges could be approximately $200 a year total. So generally in that situation (and certainly if they added further investments) the checkbook account would be the prudent option even if they didn’t do anything that required it.
Tim has $10,000 and a dream. He’ll research things and beat the streets. He’s going to study and buy and sell until that $10,000 has another comma. Checkbook control gives him the power to act quickly. It gives him the ability to take advantage of opportunities and interact with sellers and buyers more naturally. Tim needs checkbook control starting yesterday.
Patty has $1,000,000 and a dream. She’ll research things and then go to the beach. She has studied her options and has chosen to allow a good investment advisory handle the majority of her funds. They have selected several alternative investment specialists and traders to compliment the stocks Patty will invest in. Patty needs a basic account and some sunscreen.
Solo 401(k) or IRA?
Most people come to us for a self directed IRA with an LLC and checkbook control.
Most people get a Solo 401(k) with checkbook control instead.
If you’re interested in investing on your own terms, if you want to set your retirement free, read this section. IRA accounts are fine; but the Solo 401(k) is better most of the time. It really shines in areas of safety, ease of use, and cost effectiveness. Read on, and we’ll cover both. (Before proceeding, we have a presentation on the Roth 401(k) vs the Roth IRA showing the differences between them if you’d rather go the ‘graphics’ route).
Save much more, both now and in the future.
The “Roth 401(k)” is an amazing retirement account. Also known by the terms Uni(k), Solo(k), Solo 401(k) and a couple others they are all the same thing. It is a 401(k) plan that you can contribute either Traditional or Roth funds to (in our case it also allows profit sharing).
These plans are very popular among people with any amount of self employed income; and for good reason. With no earned income limits, high earners can now contribute to a Roth account and the structure allows them to very easily put about $40,000+ a year in Roth funds away as a couple… approximately $60,000 of their first $80,000 in income could go into the plan (between the Roth contributions and a match their company would make). There is no better retirement account to rapidly put money in; esp. as our plan allows profit sharing contributions too.
Worth noting, profit sharing contributions are something our plans allow and are poorly understood by many. We happily assist our clients with this overlooked and valuable designation for enhanced tax savings. Using this feature will save you more in taxes than any traditional contribution, and still has the same treatment upon withdrawal.
Solid defenses protect your retirement.
The Solo 401(k) has much softer penalties for accidental transactions in the account. IRA law is very unforgiving. When an error is made in an IRA, the account is distributed and subject to some very unkind taxation. Assuming the error happened a couple years back the penalties and interest will easily result in half or more of your account being taken, and any money left being a regular, taxable, account.
401(k) law is different; it wouldn’t be good if an employer made an error and all their employees had massive tax bills as a result. That same, more reasonable, code applies to both large and small 401(k) plans. There could still be a penalty, but realistically your account would suffer no more damage than the average mutual fund can generate in a given month, your account stays intact, protecting the funds, and preserving the tax favored status. This gives Solo 401(k) plans a clear edge in safety.
Use Real Estate? Get bigger gains on the same investment.
Sorry to geek out for a minute, bear with us… The Solo 401(k) is not subject to Unrelated Debt Financed Income tax related to real estate transactions. This section of code has a very reasonable and somewhat interesting history we can talk about if you are curious. However, most of you are here to find out how to keep more of the money you make. Thus we proceed:
401(k) plans are subject to most of UBIT (like IRAs) but, very importantly, are not subject to the section related to income from debt (UDFI) when speaking of real estate. People who are looking to buy property and finance it could easily save tens of thousands of dollars by using a Solo 401(k) plan from us instead of an IRA. See, the UBIT tax table is quite high. Think upper level trust rates. We wouldn’t like to lose 40% of our debt-financed earnings to taxes… and we’ve never met anyone who would.
As an example; you put $100,000 down on a property, and have a loan for another $100,000. After five years you sell the property for a profit of $100,000. Keeping this very simple, 50% of the purchase was financed. So 50% of the profit is subject to the (roughly) 40% tax if this was done in an IRA. That means $50,000 is subject to the tax and that tax totals approximately $20,000. Thus you only keep $80,000 of your $100,000 gain. If it had been done in a 401(k) plan instead, you would keep the full $100,000. You will have made 25% more profit just by choosing the right account type.
That knowledge has saved a number of people very large amounts money. Join them.
What if you already have an IRA account with real estate from somewhere else? The good news is two fold. One, if you have to use an IRA for real estate, you don’t have to pay the tax if the property is debt free for at least a year before you sell it. The other good news (and by far the better news); you can move the property over from the IRA into a new Solo 401(k) plan we create. 401(k) plans are not subject to the tax, so even if you happen to sell the next day, you’ll keep all the gain.
Combine your retirement money with your spouse or partner’s money safely.
Combining of funds with your spouse, siblings, kids, or business partners is something a lot of people want to do. Taking a couple smaller accounts and together buying a more expensive home comes up a lot. But IRAs can’t do it. The exclusive benefit rule gets in the way (and we suggest you back away slowly from anyone who says otherwise). With a Solo 401k you don’t run in to that issue at all because of the difference in it’s structure. Safe, organized, investing the way you want it done.
Get access to your money without penalties.
The 401(k) allows you to take a loan against it without penalty. You’ll pay yourself (your account that is) back with interest. If you need funds from an IRA, it’ll cost most people the income tax on that money plus a 10% penalty. This difference has more than paid for some people to open accounts with us even on loans as small as $6000 that would have come from the IRA distributions otherwise. You may take out funds for up to a five year term in most cases (a 30 year term in some), and the loan can be for up to 50% of the account value, with a maximum of $50,000.
What about the IRA?
So what about the IRA? It has its place. If you have employees it can be simpler and less paperwork for one. If you aren’t going to be leveraging any property, don’t desire the higher contribution limits (or the lack of income restrictions), don’t desire the ability to get access to some of the funds without penalty, aren’t married or have a partner you’d like to combine funds with, and don’t value the reduced penalties for errors in the plan then the IRA and Solo 401(k) are on equal ground; so take the more common option.
We are not trying to sound down on the IRA. It is just more clear to describe the IRA by what it lacks in comparison. If you don’t need those things, then the IRA will be the same for you, and it can cost less. If you are wondering, the super majority of plans we do are Solo 401(k) plans. Changes in the law have really made it more useful for most people. The IRA is usually on better footing if you already have a large percentage of your retirement in a Roth IRA, have no interest in earning any income outside of your W-2 day job, or you have employees.
We hope you’ve found this useful. We pride ourselves in providing the best support while being informative, helpful, and fair. We look forward to proving that to you. Thank you, and enjoy the site.
While we’re on the subject of money
You may also have noticed from other parts of our website that we have a thing for charity. We hope you do too. It isn’t right for people to save their whole lives and then have to spend what they’ve put aside to try and fight for their health. Let’s do something about it together. Contact us if you’d like to know how you can partner with us to make a difference.