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Pocket 401k for Investment Funds

pocket 401k for investment funds

IRA Financial’s Pocket 401k will allow you to use your retirement funds to invest in all types of investment funds, such as private equity, hedge funds, venture capital, real estate, and much more directly from your mobile device or PC securely, and cost effectively. You no longer need a third-party IRA custodian involved in every aspect of your investment transaction. Make private investment fund investments on your own directly from a mobile device or PC with IRA Financial’s Pocket 401(k). Additionally, rollover, deposit, or transfer funds between your investment and IRA seamlessly and without delay.

Why Investment Funds?

An investment fund is a source of capital that belongs to several investors who used it to purchase interests in an entity with a specific investment purpose of strategy. The idea behind investing in an investment funds is that the investment fund provides a broader selection of investment opportunities, greater management expertise and lower investment fees than investors might be able to obtain on their own. Some examples of common investment funds for solo 401(k) investors are:

  • Hedge Funds
  • Private Equity Funds
  • Venture Capital Funds
  • Real Estate Investment Funds

Hedge Fund

A hedge fund is a limited partnership of investors who use high risk methods (i.e., investing with borrowed money) to yield large gains. Hedge funds also tend to invest in riskier assets in addition to stocks, bonds, ETFs, commodities and alternative assets. These include derivatives such as futures and options that may also be purchased with leverage or borrowed money.

Private Equity Fund

Private equity fund is a type of investment fund that makes capital available to private companies or investors. The funds raised might be used to develop new products and technologies, expand working capital, make acquisitions, or strengthen a company’s balance sheet.

Certain individuals, often accredited investors, are attracted to private equity investments as well as large university endowments, pension plans and family offices. Private equity focuses on investing in early-stage, high-risk ventures and plays a major role in the economy.

Often, private equity will go into new companies believed to have significant growth possibilities. Private equity firms try to add value to the companies they buy and make them more profitable. For example, they might bring in a new management team, add complementary companies and aggressively cut costs, then sell for big profits.

Venture Capital

Venture capital is financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, such as accredited investors, investment banks and any other financial institutions. Though venture capital investments can be risky, the potential for strong returns is one of the reasons venture capital investors are so popular with self-directed retirement accounts. Venture capital funding is increasingly becoming a popular – even essential – source for raising capital for many start-ups, especially in the technology of biotech space. This is due to the difficulty of raising capital via capital markets or a bank loan.

Real Estate Investment

Real estate funds open the doors for investors, including solo 401(k) investors to invest in various types of properties without applying the same amount of capital they would as an individual investor. By pooling investor money, real estate funds also give investors the opportunity to explore various types of properties or real estate projects across the country. For example, some funds might focus on purchasing large residential properties, while others may focus on buying commercial properties in certain states. Real estate generally offers investors the opportunity to more readily liquidate their shares, and thus receive the funds when they need them most.

Tax Advantages

The advantage of using retirement funds to invest into investment funds is that, in general, all the income and gains the investment generates will not be subject to tax or penalty. Instead of paying tax on the returns associated with the investment fund, tax is paid later, leaving the investment to grow unhindered. Using a solo 401(k) to make a fund investment is tax advantageous because the tax on the interest payments can be deferred in the case of a pre-tax 401(k) or exempted permanently in the case of a Roth 401(k).

In addition, solo 401(k) investments are made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.

Unrelated Business Taxable Income

In general, almost all retirement account investments that generate passive income will not be subject to Unrelated Business Taxable Income (UBTI or UBIT) or Unrelated Debt Finance Income (UDFI) Tax.

The UBTI tax is only triggered if:

  • Retirement account uses margin to buy stock
  • Retirement account invests in an active business through a passthrough entity, such as an LLC

The UDFI tax is triggered if:

  • A 401(k) uses a non-recourse loan (real estate acquisition financing to purchase real estate)
  • Exemption for 401(k) plans
    • IRC 514(c)(9)

The UBTI & UDFI Trigger the Same Tax Rate

The UBTI and UDFI trigger the same tax rate, which is a maximum of 37% for 2019. Therefore, if you plan to invest in notes/loan investments with a solo 401(k) and the underlying investment involve investing in a business operated via a passthrough entity, such as an LLC, has a debt or margin, the UBTI tax rules will likely not be triggered.

At IRA Financial, you will be assigned to a specialist who will help you understand the potential application of the UBTI/UDFI tax rules and potentially reduce or eliminate it.

With a Pocket 401k for investment funds, you gain the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your 401(k) funds, as manager of the Checkbook LLC, simply write a check or wire the funds straight from your Solo 401(k) LLC bank account. The Pocket 401(k) allows you to eliminate custodian delays, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Pocket 401k structure, all income and gains from 401(k) investments will generally flow back to your LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the 401(k), as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the LLC will flow-through to the 401(k) tax-free!

Why Use a Solo 401(k) to Invest in Notes/Loans

Unfortunately, none of the major financial institutions will allow you to use 401(k) plan funds to invest in Notes/Loans or essentially anything outside of Wall Street. The reason for this is simple: banks do not make money when you invest in non-traditional equities, such as private equity or venture capital investments. They make money when you buy stock, mutual funds, and other financial products they market. As a result, a large number of individuals are turning to a Solo 401(k) to invest in private investment funds.

What is the Pocket 401k?

IRA Financial’s Pocket 401(k), also known as a solo 401(k) with checkbook control is an IRS approved structure that allows one to use his or her retirement funds to make investment fund investments tax-free and without custodian consent. The Pocket 401(k) involves the establishment of a limited liability company (“LLC”) that is owned by the 401(k) (care of the custodian) and managed by you or any third-party. As manager of the LLC, you will have control over the assets to make the investments you want and understand – not just investments forced upon you by Wall Street.

How it Works:

  1. Establish the solo 401(k) with IRA Financial Trust & Capital One online though our mobile app.
  2. Your 401(k) cash/assets can be rolled over to IRA Financial Trust tax-free directly from our mobile app.
  3. The assets will be transferred to a new Solo 401(k) plan checking account with Capital One Bank. Your assigned specialists will help you open a self-directed plan account with Capital One seamlessly and with no wiring fees or minimum balance requirement. Now you can establish a solo 401(k) with checkbook control and not visit a bank or deal with bank opening documentation. Our special partnership with Capital One Bank makes IRA Financial the only self-directed provider that can open a solo 401(k) plan bank account for our clients. This makes the process quick, easy, and cost-effective. As manager of the LLC, you will open a bank account for the LLC at any local bank. IRA Financial will draft an LLC Operating Agreement identifying you as manager of the LLC and the 401(k) as the sole member.
  4. You, as manager of the LLC, will then have checkbook control over all the assets/funds in the LLC to make the real estate investment. Since the LLC is owned 100% by a 401(k), it will be treated as a disregarded entity for tax purposes. You do not need to file a Federal income tax return, and all income and gains will flow back to the 401(k) without tax.

With a Pocket 401k for investment funds, you will have the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your 401(k) funds, as manager of the Checkbook LLC, simply write a check or wire the funds straight from your Solo 401(k) LLC bank account. The Pocket 401k for investment funds allows you to eliminate the delays associated with a custodian, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Pocket 401k structure, all income and gains from 401(k) investments will generally flow back to your LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the 401(k), as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the LLC will flow-through to the 401(k) tax-free!

2019 Most Popular Investment Fund Investments

The following private fund investments have been popular with our solo 401(k) clients in 2019:

  • Real estate investment fund
  • Private equity funds
  • Hedge funds
  • Venture capital funds
  • Mortgage note pooled fund

Getting Started

We’re here to help. If you want to establish a Pocket 401k to make investment fund investments, contact IRA Financial directly at 800-472-0646. You can also fill out one of our contact forms to speak with a tax specialist.

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