When using retirement funds to make non-traditional investments such as real estate there are generally two investment vehicles that are used – the Self-Directed IRA LLC and the Solo 401K Plan.
The Self Directed IRA LLC is an IRS approved retirement structure that allows one to use their retirement funds (IRA or 401(k)) to make traditional as well as non-traditional investments, such as real estate tax-free!
A self directed IRA LLC structure with checkbook control involves the establishment of a special purpose limited liability company (“LLC”). The LLC will be owned by the IRA and managed by the IRA holder (you). Your retirement funds then be transferred or rolled over tax-free from the current IRA custodian to a new IRA Passive Custodian. An IRA Passive Custodian, unlike a traditional IRA custodian, allows for traditional as well as non-traditional investments such a real estate. The new IRA Passive Custodian would then transfer the IRA funds tax-free to the newly established special purpose IRA LLC. As manager of the Self Directed IRA LLC you will have checkbook control over the iRA funds. At that point, the IRA funds would be available for investment.
The Solo 401K Plan offers the same self-directed investment opportunities as a Self Directed IRA LLC, in addition to offering many options not available with a Self Directed IRA. A Solo 401K Plan, also known as an Individual 401K or Self Directed 401K is an IRS approved retirement plan that is designed specifically for the self-employed or for a business with no employees.
Like a Self Directed IRA with checkbook control, as the trustee of the Solo 401K Plan, the plan participant (you) will have the freedom to make all investment decisions for your Solo 401K Plan (“checkbook control”) without requiring the consent of a custodian. Therefore, a Solo 401K plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling one to act quickly when the right investment opportunity presents itself. Like a Self Directed IRA LLC where the IRA holder will serve as the IRA LLC manager, in the case of a Solo 401K Plan, the business owner can serve as trustee of the Solo 401(k) Plan. Accordingly, as the Solo 401K Plan trustee, making an investment is as simple as writing a check straight from the Solo 401K Plan bank account, which can be opened at any local bank or credit union. In addition, unlike a Self Directed IRA with checkbook control with requires the formation of an LLC, with a Solo 401K, the Plan can be adopted by any business including a sole proprietorship. The fact that an LLC does not have to be established is quite significant for investments made in the State of California since California imposes an $800 minimum annual franchise fee on all entities doing business in California.
Like a Self Directed IRA LLC, by using a Solo 401K Plan with checkbook control, as trustee of the Solo 401K Plan you can make traditional (stocks, mutual funds, etc) as well as non-traditional investments (real estate, precious metals, tax liens, private businesses, etc) tax free and without requiring the custodian consent. With the Self Directed IRA and Solo 401K Plan, you will have control over your retirement funds so you can purchase real estate, precious metals, and much more tax-free!
In general, both the Self Directed IRA LLC and Solo 401K Plan offer checkbook control features, although, only a self-employed individual or small business owner with no employees can adopt a Solo 401K Plan. For those looking to borrow against their retirement funds, make high annual tax-deductible contributions (up to $54,500), have direct access to their retirement funds, and not be required to form a LLC, the Solo 401K Plan is the perfect investment and retirement solution.