WelcomeServicesProfileTax UpdatesTax Services PricingContact UsSelf Directed IRA/401kWhy 401k?sdira401k.com FAQRetirement Plan PricingResourcesRequest InformationEventsOur PartnersBloge-mail me

What types of self directed plans are there?

Generally, there are two types of plans available for the self-directed investor; an individual retirement account, or IRA, or an individual 401k. These plans fall under different sections of the IRS code, and each have distinct treatment by the IRS. In the case of the 401k, (sometimes referred to as solo 401k, solo k, i401k, self employed 401k etc.) the Department of Labor has additional regulations that must be followed, as this is an employer sponsored plan (see Why 401k? for more specific details).

Back to Top


How can I use a self-directed 401k or self-directed IRA?

Self directed IRAs or self directed 401(k)s allow you additional diversification from your traditional investments (stock, bonds and mutual funds) to “non-traditional investments.” This can be real estate, deeds of trust, notes, tax liens and other private placements. You can use your investment knowledge and proficiency to help you prepare for your retirement. Genesis Tax Advisors, LLC will help guide you through this exciting process.

Back to Top


Can I get a mortgage to invest in a self-directed 401k or self-directed IRA?

Yes, you may, but only with a non-recourse loan. Typically you must put down 30 percent to 35 percent.

Back to Top


What is a non-recourse loan?*

With a non-recourse loan, the note can only be secured by the property itself. It cannot be personally secured. The lender can only use the property as collateral to secure the note. If your IRA fails to make the loan payments, the only collateral the lending institution can come after is the property itself, and not the IRA. Please consult your tax adviser about any Unrelated Business Taxable Income (“UBTI”), and any taxes that may be due. Non-recourse loans with your self-directed IRA are a great way to help you to be able to diversify. Please contact us for more information about a non-recourse loan. *Non-recourse loan is a loan that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable.

Back to Top


What can I invest in if I have a Self-Directed 401k or Self-Directed IRA?

The same investments that you make outside your IRA or 401k can now be made within it. You the investor have tremendous flexibility to make almost any investment.

Back to Top


What types of retirement accounts can be moved into Self-Directed accounts?

• Traditional IRAs • SEP IRAs • Roth IRAs • 401(k)s • 403(b)s • Coverdell Education Savings (ESA) • Qualified Annuities • Profit Sharing Plans • Money Purchase Plans • Government Eligible Deferred Compensation Plans (457) • Keoghs

Back to Top


Is this new?

No. There are more than 10 million retirement accounts; however, only about 3% to 5% of retirement accounts are self-directed and only about 2% are invested in Real Estate. But what most people don’t know is that the stock market ro your bank isn’t your only investment choice for your 401k or IRA. You have been able to invest in Real Estate since the day 401k and IRAs were created. That was many years ago!

Back to Top


Are there downsides?

You must be aware of the prohibited transactions / restrictions (no self-dealing). See Resources for IRS publications and other pertinent information. Additionally, you may have some additional forms to file, and some additional bookkeeping. This is a small tradeoff for giving you the potential for higher returns with greater security.

Back to Top


How are IRA custodians different from each other?

The government allows certain institutions to handle the accounting and reporting of IRAs. Under the law, all custodians can allow you to invest your IRA in the same types of investments (stocks, bonds, real estate, notes, tax liens, etc.). However, the majority of custodians have made the decision to restrict the types of investments you can make. This is not based upon law, but it is based upon what the custodian wants to offer. However, there are a handful of custodians who allow non-traditional investments. Please contact us for a special report on self-directed custodians.

Back to Top


Do I have to have a custodian?

In an IRA, the answer is yes. One of the major advantages of a self-directed 401(k) plan over an IRA plan is that the IRS does not strictly require a custodian for these types of plans. You can be you own Trustee and further reduce your ongoing costs, should you qualify for these types of plans. See Why 401(k)? for more information.

Back to Top


Do I get complete control?

Having a self-directed 401k or self-directed IRA is one step toward obtaining complete control. To obtain a truly self-directed IRA account you need the IRA Plan’s LLC. This is the structure that gives you total control. When you simply establish an account with a self-directed custodian, you are still required to get permission from the custodian before making each investment. This can be time consuming, cumbersome, and more expensive than it needs to be. With the IRA Plan’s LLC you are then able to make investments the minute you decide to without getting permission from anyone. You have the control. You are in command of your retirement money. We firmly believe that you are the best steward for your money. Nobody cares as much about your retirement as you do.

Back to Top


Does a self directed 401k plan require a LLC?

The simple answer is no. Since the 401k has a trust account and no custodian, you are able to invest directly from this account. You may want to establish a liability shield should you invest in more than one asset with your plan, especially when investment real estate is involved. This can be a LLC or other such structure, but it is not required for total control of your retirement plan. Additionally, a pass through entity may be viewed as an unrelated business to your plan, and be subject to Unrelated Business Income Tax (UBIT). Be sure to proceed carefully when directing your self-directed 401k to own a LLC.

Back to Top


How do I know that this is legal?

This is a question that is frequently asked by investors who have never heard that they could invest in anything other than stocks and bonds. They have no idea that they can invest in Real Estate and many other investments. However, Real Estate has been an allowed investment since the day IRAs were created almost thirty years ago. See the Resources link here for Publication 590 and for further information.

Back to Top


Can I transfer funds from a 401K, IRA, Sep IRA, Roth IRA, or 403b and direct investments myself?

Can I transfer funds from a 401K, IRA, Sep IRA, Roth IRA, or 403b and direct investments myself?

Back to Top


What does the IRS think of investing your 401k or IRA in Real Estate?

The IRS makes the following statement on their website “…..because of administrative burdens, many IRA trustees do not allow IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

Back to Top


Can my self directed 401k or self directed IRA purchase Real Estate I already own?

No. This would be considered a prohibited transaction (see IRC 4975). You many not purchase property which is currently owned by you or any other disqualified person (see below). You would need to find another Real Estate offering that you don’t already own to purchase with your self directed plan.

Back to Top


Why does my current broker say I can’t buy Real Estate in my IRA?

Likely because your current broker won’t let you invest in real estate through their custodian. Just because that isn’t something they offer doesn’t mean that you can’t do it; It just means that you can’t do it through them. It is a limitation that your broker is placing on your IRA NOT one that the IRS is placing on your IRA.

Back to Top


What is the easiest way to buy Real Estate using my Self-Directed IRA?

The IRA Plan’s LLC is the way to get total control over your IRA. A self-directed IRA account isn’t enough. You will still need to get permission and have someone else sign off on all investments you want to make. If you are ready to be in control of your IRA, you need the IRA Plan’s LLC.

Back to Top


If I buy an income producing rental property, what happens to the rent income?

The income goes back into the IRA Plan’s LLC, and you retain the tax deferred or tax free status of the investment. In the 401k, income remains in the plans trust or participant account.

Back to Top


I don’t have enough money in my IRA to purchase a piece of property outright. Can my Self-Directed 401k or IRA get a loan and use my 401k or IRA money as the down payment?

Yes you can use your 401k or IRA money as the down payment and then have your IRA Plan’s LLC or 401k trust get a loan for the balance. However, you will not be able to personally guarantee the loan. It must be a non-recourse type of loan which means that if your IRA fails to make payments, the only recourse the lender has is against the property itself. Further, there will be tax ramifications to doing so; UDFI (unrelated debt financed income) tax applies when a loan is obtained on your IRA (UDFI does not apply to 401k plans)so you would want to confer with your tax professional about what forms would be necessary.

Back to Top


My IRA is small. Can I personally co-invest with my IRA?

It is not a prohibited transaction for you to co-invest with your IRA. However, there are certain formalities that need to be adhered to, and there are some situations where it isn’t advised.

Back to Top


Can my IRA co-invest with friends?

Yes. IRAs may purchase an undivided (and proportionate) interest in Real Estate typically in a tenant-in-common ownership.

Back to Top


May I use my Self-Directed 401k or IRA funds to make improvements or renovations?

Yes. In fact, you must use Self-Directed 401k or IRA funds to make the improvements and pay all expenses associated with the property. All expenses of the property are paid with 401k or IRA funds, and all profits made on the property are returned to the 401k or IRA. This makes sense because it is an investment of the 401k or IRA.

Back to Top


Can I buy vacation property?

Yes. Doing so would not constitute a prohibited transaction. However, you cannot vacation there.

Back to Top


Can I buy my dream retirement home with my Self-Directed 401k or IRA and then live in it when I reach the age of retirement?

Yes. Your IRA would be the original owner. You would use your IRA money to make the purchase and maintain the property. Any rents generated would be returned to the IRA. However, upon reaching retirement age, the property could be distributed out to you. Of course, you would have to pay taxes at that point but without penalty.

Back to Top


What are the advantages to using an IRA Plan’s LLC when investing my IRA in Real Estate?

You can only receive true checkbook control with the IRA Plan’s LLC. With a self-directed custodian, you get more control than you get with a traditional custodian, but you still have to get permission from the custodian for every transaction you make. This is problematic and can be expensive. Further, with any time sensitive investment it puts you at a huge disadvantage. With the IRA Plan’s LLC you have the checkbook, authority to write the checks, and can make an investment without time delays. This ensures that your IRA is able to make the best investments at the best prices. With the IRA Plan’s LLC your IRA will be subject to fewer and lower fees from the custodian. Thus, there is more money for your retirement, which is the whole goal of an IRA.

Back to Top


Can my Self-Directed 401k or Self-Directed IRA get a mortgage on a property?

Yes. The mortgage would need to be a non-recourse type of loan, meaning that if your IRA fails to make the payments, the only recourse the lending institution has is the property itself. Also, be aware that if your IRA obtains a loan, unrelated debt financing income (UDFI)tax will apply.

Back to Top


Can my Self-Directed 401k or IRA make loans to other individuals who want to buy Real Estate?

Yes. Your IRA can loan money to a other non-disqualified person or parties to finance the purchase of property or the development of property.

Back to Top


Can my Self-Directed 401k or IRA make loans to businesses or companies?

Sure. Your IRA can make a loan to any type of business. However, be aware that there are some restrictions on loaning money to any business that you or any other disqualified person has an ownership interest in.

Back to Top


Do taxes and penalties apply when I take money out to buy Real Estate?

No. You DO NOT take money out to purchase Real Estate or anything else you want to buy. It is just a purchase of your Self-Directed 401k or Self-Directed IRA. There are no taxes or penalties. Instead of buying 1000 shares of Microsoft or any other typical stock, your Self-Directed 401k or IRA is just making a different type of investment. The method of doing so is different but the tax ramifications are the same.

Back to Top


Are the gains that my Self-Directed 401k or Self-Directed IRA makes taxable?

Not in most cases. If an IRA buys a piece of property and then sells it at a profit, the gains stay within the IRA. If you have a traditional IRA, the gains are tax-deferred. If you have a Roth IRA, the gains are tax free.

Back to Top


Does it still make sense to use leverage?

It certainly can. Because of your increased buying power when you use leverage, the profits you make from the ability to use leverage can greatly outweigh the potential UDFI tax associated in an IRA. Keep in mind that leverage can increase the risk of loss as well as the potential for profit, so proper use of leverage for your specific risk tolerance, goals, needs, and resources is critical.

Back to Top


Can I invest outside of my state or outside the country?

Yes. Just as you have International Investments available in the form of Mutual Funds or Exchange Traded Funds, your self directed IRA or self directed 401k can invest outside of the U.S.

Back to Top


What are Prohibited Transactions?

Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your IRA. The IRS defines a prohibited transaction as follows: “Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant).” - IRS Publication 590 - IRC 4975 is the section that lays out the rules on prohibited transactions. Prohibited transactions generally involve one of the following: (1) doing business with a disqualified person; (2) benefiting someone other than the IRA; (3) loaning money to a disqualified person; or (4) investing in a prohibited investment. ---- In plain English, prohibited transactions are those transactions that violate the basic intent of the IRA. Your IRA must benefit rather than benefiting you personally. In other words, there can be no “self dealing” transactions. However, there are many ways in which you can invest your IRA and not be in violation of the prohibited transaction law. And when your IRA benefits, you benefit because it is for your retirement.

Back to Top


What are Prohibited Investments?

The Internal Revenue Code does not specifically authorize investments within an IRA; rather, the code outlines what types of investments are not allowed. The Prohibited Investments include (401k rules can differ on certain items): • Artwork • Rugs • Antiques • Metals • Gems • Stamps • Coins • Beverages • Stock in a S-Corporation • And certain other tangible personal property

Back to Top


Who is a disqualified person?

1) the IRA holder and his or her spouse; 2) the IRA holders ancestors, lineal descendants and their spouses; 3) investment advisors and managers any corporation, partnership, trust or estate in which the IRA holder has a 50% or greater interest; 4) and anyone providing services to the IRA such as a trustee or custodian.

Back to Top


How am I a disqualified person? It doesn’t seem to make sense.

There is a clear distinction between your IRA and you individually. You and your IRA are not the same. Your IRA is a separate Trust for your benefit when you retire.

Back to Top


What would be classified as Self Dealing?

Self dealing is using your IRA in transactions that in some way benefit you (or other disqualified persons) individually. The purpose of your IRA is to provide for your retirement. It is not intended to benefit you prior to retirement and distribution of the funds.

Back to Top


What are some types and examples of Prohibited Transactions and / or Self-Dealing Transactions?

1) Self dealing with a family member (having your IRA purchase a home from you father 2) Self dealing with yourself (having your IRA purchase a home from yourself) 3) Personal use of IRA property (buying a rental vacation home with IRA money and then staying in the home when on vacation) 4) Receiving personal benefit from your IRA (paying yourself for work that you do on the property such as repairing the roof)

Back to Top


What are Exemptions?

Exemptions are permission to invest in something or in some way that is technically a prohibited transaction. For example, it is a prohibited transaction to rent property owned by your IRA to your child. An exemption would allow you to do so.

Back to Top


What are IRS Non-Excluded Investments?

Commercial Real Estate - Residential Real Estate - International Real Estate - Tenants in Common Property (TIC’S) - Tax Liens, Tax Deeds, Tax Certificates - Mortgages, Loans, Notes - Real Estate Options - Small Businesses, Franchises - Private Stock, and Publicly Listed Stock - Limited Liability Companies - Limited Partnerships - Raw Land - Receivables - Mutual Funds , Exchange Traded Funds (ETFs) - Annuities - Options - Currency (FOREX) Futures - Commercial Paper

Back to Top


Real Estate

The first thing to remember when your IRA purchases real estate is that the property is for investment purposes only. Your IRA must take title to the property. For example: Custodian Name FBO (for the benefit of) John Smith IRA. Your IRA may purchase property from an unrelated party (anyone who is not disqualified). Any income from the property such as rent goes back into the IRA. Likewise, any expenses, such as property management fees, maintenance, etc. are paid from your IRA. It is advisable to use a property management company to avoid any prohibited transactions. When the property is sold funds also go back into the IRA and remain tax-deferred or tax-free if using a Roth IRA. There are various ways to hold title to real estate. In addition to Tennant-in-Common, you may form an LLC and pool different funds together to purchase. For instance, you may use your IRA funds together with a non-recourse loan or with other investors. These different entities all own a part of the LLC, percentages being based on the amount of money invested.

Back to Top


Below are just some of the types of real estate you can invest in with your IRA:

• Residential homes, condominiums, duplexes, four-plexes • Commercial retail, apartment complexes, office condominiums, homes • Industrial manufacturing, warehouses • Fractional ownership, sometimes referred to as TICs (tenant-in-common) • Land A non-recourse loan may also be secured to purchase investment real estate with your IRA. Typically the down payment for these loans is 30% to 40%. Guidelines for these loans do not normally use credit scores or income for loan qualifications.

Back to Top


Mortgage Notes and First Deeds of Trust - Types of Mortgage Instruments

Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust. The Mortgage In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt. The Deed of Trust The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee. It is also possible to foreclose them through a judicial proceeding

Back to Top


Tax Liens

Payment of a tax lien may occur through various methods: • Payment may be made directly by the property owner or, in many cases, indirectly by the mortgage holder using an escrow account. Notice is given both to the property owner and mortgage holder when a property tax is delinquent; thus, even if the property owner does not have an escrow account on the mortgage, the mortgage company will receive notice of the delinquency and may pay the tax. The mortgage companies will then demand repayment from the owner/borrower and/or create an escrow account to recoup the proceeds, since the mortgage company might lose some of the value of its mortgage lien if the property were sold by the taxing agency to satisfy unpaid taxes foreclosure. • If a property is sold by the owner prior to tax foreclosure by the government body, the tax lien (which is generally discovered as part of a title search) is usually paid as part of closing costs from the sale proceeds. • Procedures vary from State to State. Generally, in the event a tax lien on personal property is not paid within a specified time (and after several notices are generally given), the property may be seized and sold at foreclosure sale. On real property, one of two methods may be used: either the property may be seized and sold (a tax deed sale), or in some States the tax lien may be offered to investors (in the form of a tax lien certificate) with an accompanying right for the investor, after a specified period of time, to institute foreclosure proceedings (a tax lien sale).

Back to Top


TICs (Tenants in Common)

TIC ownership is a form of real estate asset ownership in which two or more persons have an undivided, fractional interest in the asset, where ownership shares are not required to be equal, and where ownership interests can be inherited. Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. Through TIC ownership, the average qualified owner of investment real estate is able to enjoy ownership in an institutional-type property with a lower or smaller investment.

Back to Top


Private Placements

A private placement is a direct private offering of securities to a limited number of sophisticated investors. It is the opposite of a public offering. Securities issued as private placements include debt, equity, and hybrid securities. An "equity" offering is where the company sells partial ownership in the company (via the sale of stock or a membership unit) to raise capital. Equity offerings are preferred by early stage companies because there is no set repayment schedule or debt service payments - the investors profit when the company profits. A "debt" offering is where the company raises debt financing by selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full. A debt offering functions much like a business loan except instead of a bank providing the financing it is a group of investors lending funds to the company. IRAs can own stock or membership interests in a company. It is important to note in these situations that compliance will scrutinize the investment for any violations of prohibited transactions (i.e. self-dealing, related-party transactions, etc.).

Back to Top


As with any investment, you should consult an attorney, tax professional or your financial adviser to determine if investing in any of these items is right for you.

As with any investment, you should consult an attorney, tax professional or your financial adviser to determine if investing in any of these items is right for you.

Back to Top


Can I buy a business with my Self-Directed 401k or IRA?

Generally the answer is yes. Please contact us for details.

Back to Top


Can I invest in an existing business?

This can be done as the purchase of stock as a loan to the business within certain parameters.

Back to Top


What about S-Corporations?

S-Corporations do not allow IRAs as investors; they only allow individuals as investors. Therefore, it isn’t so much that IRAs are prohibited from investing in S-Corporations rather that S-Corporations don’t permit having an IRA as a shareholder. It is likely that the investment of the IRA would revoke the sub-s status of the corporation.

Back to Top


Can I buy Stocks, CDs, Bonds, Options, etc.?

Yes. You can invest in any IRS permitted investment. That includes publicly traded stocks, CDs, mutual funds, annuities, bonds, stock options, futures, etc. In fact, if you are an active swing trader or day trader, you will be able to trade your IRA in a manner that your current broker does not allow you to trade using the IRA Plan’s LLC. For example, you probably have asked your broker if you can buy or sell Options (Calls and Puts). Or maybe you would like to write Covered Calls or do Spreads and have been told no. The IRA Plan’s LLC allows you to trade your way.

Back to Top


I have a 401K with an old employer. Can I move it into the Self-Directed 401k or IRA?

Yes. You can move these 401K funds into the Self-Directed 401k or IRA. You can start controlling this money yourself rather than letting your old employer control your future.

Back to Top


I have a 401K with my current employer. Can I move it into the Self-Directed 401k or IRA?

The 401K plan documents will specify what you can do. Contact you Human Resources department to see if your plan allows for diversification outside of your current plan.

Back to Top


I have several IRAs and old 401Ks. Can I combine them?

Yes. The can all be combined and then invested into your Self-Directed 401k or Self-Directed IRA so that your buying power is maximized. You can usually combine multiple retirement accounts into one account. Or in the event that they can’t be combined, such as the case of a traditional IRA and a Roth IRA, they can still be invested into the same IRA Plan’s LLC so that you still have maximum buying power.

Back to Top


How can I get more information?

Email us at info@sdira401k.com

Back to Top