As you can see from the chart above, and as you may know from our free education posts, articles and videos… the Solo 401(k) can be structured to be much more powerful than any IRA.

These extra powers (self-trustee, participant loan, higher tax-deductible contributions, etc) are made possible by careful preparation of the plan documents.

Here’s how a Solo 401(k) is different:

• Requires document maintenance
• Doesn’t require custodian

401(k) document maintenance fees are much lower than IRA custodian fees, and to make the 401(k) even more of a no-brainer, it eliminates all unnecessary transactional paperwork and delays  ;-)

[This post originally appeared at JeffNabers.com]

Sorry.

I apologize for how we generally haven’t been accepting new self-directed Solo 401k clients in over a year… but I promise I’ll make it up to you.

You see, we’ve been working hard developing ways to go the extra mile in helping our self-directed Solo 401k clients get good results with their investing.

I just created a free video series about successful Self-Directed/Solo 401k investing.

And if you sign up to view the free video series, you’ll have an opportunity to get an amazing deal on a Self-Directed 401k.

In fact, in the first video I actually lay out how you can measure what a Self-Directed Solo 401k can be worth to you. It’s mind boggling! Millions of dollars. No joke.

Check it out.

[Originally Published at JeffNabers.com]

You may be wondering why I haven’t blogged about real estate investing in a while. There’s a very good explanation video at Nabers.TV for you to check out.

Solo 401k was thrust in the spotlight again last week because of its powerful ability to reduce your self-employment income through large tax-deductible contributions.

Unfortunately, the writer of that WSJ article is mildly financially retarded. Take a look for yourself. Read the article to hear about the powerful tax benefits (albeit presented in a fantasy situation), and then read the comments to have some real people bring the concept back to reality.

In the last post, you learned about how doing an active “entrepreneurship-ish” deal inside your Solo 401(k) is an open invitation for the IRS to tax the hell out of you.

In this post, you’ll learn the solution.

• The solution is not to avoid doing active deals.
• The solution is not to stop pursuing massive profits or to lock away your talents and skill to be unused.

The solution is to structure both your active entrepreneurship and your passive investment activity in a way that that puts you in the most control. Put another way, avoid giving the IRS an open invitation to tax attack you.

I bet you can guess where this is going (one commenter had a pretty good idea on Part 1 of the post)…

Active Deal Structure

Run your active entrepreneurship activity (a.k.a. “business activity”) in your… (wait for it)… business! Your business can be a Sole Proprietorship or it can be more formally structured as an LLC or Corporation.

If your entrepreneurship needs a financial kickstart, borrow up to $50,000 (or $100,000 between you and your spouse) in the form of a “participant loan” from your pre-existing retirement funds. Do your business activity, generate massive profits, and contribute up to $54,500 (or $109,000 between you and your spouse) tax-deductibly each and every year. That adds up quickly.

Passive Deal Structure

Run your passive investments through your Self-Directed Solo 401k (a.k.a. your investment account).

My God, that sounds too simple to be effective, you may think. Hey now, don’t fall into the “scheming pit.”

Over 95% of the Self-Directed Solo 401(k) conversations I see online are all about some sneaky structure to reign triumphant over the IRS, like a clever fox. Sounds like a good bubble to burst, so I don’t mind if I do…

The IRS doesn’t like being tricked. They can even be mean from time to time. I can’t help but to wonder how much profit would have been made if the millions of hours of sneaky scheming were to be replaced with taking action on making good investments with a non-risky tax approach.

Side Benefits

There are side benefits to this sound approach too.

Many Self-Directed Solo 401(k) investors are doing active real estate deals inside their retirement plan. That introduces further limitations, especially with debt financing, such as:

• Lower LTV (loan-to-value ratio) loan limits
• Less lenders and loans available in the marketplace
• Higher down payment (more cash investment required, which lowers cash-on-cash return)

Don’t get me wrong. Many healthy, profitable real estate deals are done inside retirement plans and with debt financing.

But, not all real estate deals should be done either inside or outside of a retirement plan. It depends on the circumstances.

If it’s truly a passive investment, go for it inside your plan. If it’s truly an active deal, go for it outside of your plan. If you want to pay cash or make a large down payment, that sounds fitting for inside your plan. If you want to invest as little cash as possible, that sounds fitting for outside your plan.

So, I hope this helps you get your mental strategery in order.

Like many lessons in life, the real progress is made in unlearning myths, deceptions, and bad information. I mean, it isn’t exactly earth shattering to stand up and say “Business activity goes in a business, and investment activity goes in an investment plan,” is it? Yet, after thousands of hours in the Self-Directed Solo 401(k) industry, it may make a big impact.

——

Odds & Ends:

Don’t miss out on my year-end Solo 401k special promotion. Get on my email list to be notified when it kicks off.

]]> http://www.solo401k.com/2010/11/18/the-most-elusive-dangerous-self-directed-solo-401k-practice-part-2/feed/ 8 http://www.solo401k.com/2010/11/16/the-most-elusive-dangerous-self-directed-solo-401k-practice/ http://www.solo401k.com/2010/11/16/the-most-elusive-dangerous-self-directed-solo-401k-practice/#comments Tue, 16 Nov 2010 21:09:10 +0000 Jeff Nabers http://www.solo401k.com/?p=323 [Originally published at JeffNabers.com.]

There’s something that most “successful” Self-Directed Solo 401(k) investors do that can spin them out of control and get them into trouble.

I say “successful” in quotation marks because I’m talking about the particular kind of Self-Directed Solo 401(k) success that is sexy enough to be frequently written about.

What is this dirty deed that leads to massive profits and the potential implosion the very same Self-Directed Solo 401(k) that got those profits?

Entrepreneurship.

Bad Entrepreneur!

Yep. Entrepreneurship is so powerful that it seems to be the source of all aggressive wealth creation. So where’s the danger?

Let me explain. Some of the most [initially] profitable Self-Directed Solo 401(k) stories sounds something like this…

Joe, a Self-Directed Solo 401(k) investor, knows how to work real estate deals into profits. So he buys and sells real estate in his Self-Directed Solo 401(k). Sometimes he involves bank financing. Sometimes he involves private financing and partnering.

But one thing is for sure: Once Joe purchases a property, the work has just begun. He has a system. He only buys properties that meet a certain criteria. After the closing, he usually has repairs and/or remodeling work done.

And his system works. He’ll put $30k or $40k of his Self-Directed Solo 401(k) money into a deal and get $80k to $100k out, often less than a year or two later.

First, applaud Joe for being a successful entrepreneur.

Did you catch that? Joe is being an entrepreneur rather than an investor. This is because his deals have his active involvement rather than the passive placement of his money.

The Pinless Grenade

Unbeknownst to Joe, he’s no longer in control of his financial outcome. His choice to try to sneak business activity inside his Solo 401(k) gives the IRS an open invitation to tax the hell out of him.

How much?

Well, the IRS can declare Joe’s Solo 401(k) deals to be a “trade or business” in which they’ll apply the UBTI tax. Also known as the most aggressive tax schedule in the United States. It ramps up to 35% federal tax after only $10,000 of profit.

Will the IRS make this move? When?

That’s unknown, and Joe is no longer in control of his financial outcome.

Terrible Success

All kinds of strategies fit into this same category. I have a friend who has done over 100 deals inside his Self-Directed Solo 401(k), producing a return-on-investment of over 9,000%.

And he’s hiding under a rock. He won’t returns the calls of the newspaper and magazine reporters who want him to share his strategies with the world. He rarely teaches investing seminars, and when he does he only invites people who he has personally met and known for at least 6 months. He essentially lives a life of fear because he knows the day his Self-Directed Solo 401(k) gets audited may be the day he gives up at least $1,200,000 plus late penalties and interest to the IRS.

Enjoyable, Controlled Success

Do you know how to do deals that turn pennies into thousands? Thousands into millions?

Fantastic.

Don’t ever consider not pursuing massive profits, and don’t ever lock away your talents and skills to be unused.

Just take a few minutes to educate yourself about the best way to structure your deals to keep you in control.

More info coming in Part Two of this post soon  :-)

Now you can download a small piece of software that turns your computer into a portal for setting up your new Solo 401(k) in minutes.

Faster Creation

You can literally bring your Solo 401(k) plan into existence the same day that you get the software. You don’t have to be full-time self employed to qualify either; self-employment activity on the side of full-time employment elsewhere still qualifies you for the Solo 401(k).

Easier Transactions & Maintenance

It also makes certain tasks easier beyond setting up and funding the plan with rollovers. For instance, if you ever need to draw on the participant loan feature that lets you borrow up to $50,000 tax-free from your retirement funds, you can just fire up the software and get the loan funds (up to $50,000) in your hands on the same day.

Making contributions has never been easier. Use the software to instantly calculate your maximum legal contribution (up to $54,00) each year. Double that if your spouse is involved in your self-employment activity because she (or he) can contribute up to the same limits as well.

Clearer Benefit

There’s even a value calculator that shows you how much your 401k plan is measurably benefiting you. Most people find it’s in the tens or hundreds of thousands of dollars per year.

Total Control

And, of course, enjoying the power of controlling the checkbook for your own 401k investments comes with unlimited, legally-allowable possibilities… such as investing in:

• Private businesses equity
• Non-dollar, safe offshore investments
• Private lending
• Real estate
• Tax liens
• Virtually anything else (just no “self-dealing” or conflict-of-interest transactions)

After thousands of private trials gone smoothly and plenty of early adoption switch-over from our existing loyal clients, we’ll be doing a big promotion to celebrate making this available for new clients.

If you’re on my email list, you’ll be the first to get access.
[You can can join it if you haven't already]

Thanks for all your support, and everyone here at Nabers Group is ecstatic about unveiling our latest way to give back to the community!

Suggested reading: World Wealth Report

This annual report examines the behavior of high net worth individuals (HNWIs) – those with over $1 million in investable assets. I believe this report is skewed a bit because it is based on survey data of Merrill Lynch clients around the world. Even so, it offers interesting information.

Among the most substantial findings is that business ownership is estimated to be the leading source of wealth among HNWIs globally. This is contained in the 2006 WWR.

Click here to view WWR archives.

Solo 401(k) retirement plans can grant direct checkbook control without the use of an LLC or custodian.

The concept of custodian comes from Internal Revenue Code Section 408(a)(2) and is defined in Section 408(n). This entire IRC section 408 is devoted to Individual Retirement Accounts, or IRAs. The code basically explains that an IRA is normally a trust, and the trustee must be a bank. It then defines bank as a bank, trust company, or any company specifically approved by the IRS. This capacity of trustee to an IRA is known as “custodian”. This trustee role is simply that of investing the plan as directed by the accountholder.

A Solo 401(k) plan is a type of 401(k) that is designed for self employed individuals whose businesses have no full time employees. All 401(k) plans are qualified plans, and qualified plans do not have any special restrictions on who can serve as trustee.

So the significant difference is that with a Solo 401(k), the participant can actually be the trustee and handle the investment transactions themselves. This can serve to simplify operating the plan because no third party is introduced. Such simplification can also serve to minimize third party fees.

Titling of Assets

If you’ve been researching or operating a self directed IRA, you may be familiar with how IRA assets must be titled. If Jeremy Smith had an IRA with Sunwest Trust, his IRA’s assets would be titled as:

Sunwest Trust, Inc. F/B/O Jeremy Smith IRA

“F/B/O” means “for benefit of”. To experience the benefits of checkbook control, some self directed IRA accountholders choose to create a special purpose LLC to be owned by their IRA but managed by them. So the membership units of the LLC would be titled as:

Sunwest Trust, Inc. F/B/O Jeremy Smith IRA

…and Jeremy (as manager of that LLC) would further invest the new LLC funds to purchase assets that would be titled in the name of the LLC.

To own and directly control retirement assets in a Solo 401(k) plan can be much simpler. Jeremy would simply have his plan setup to name himself as trustee. He would then direct the plan to purchase assets to be titled to:

Jeremy Smith Solo 401k Trust

…or whatever Jeremy chooses to name the trust that exists for the sole purpose of managing the assets for his Solo 401(k) plan. In this case, there is absolutely no need to setup an LLC for the purpose of gaining checkbook control.

This convenience is little known because conventionally 401(k) plans have served as an investment vehicle for large corporations with many participants. Solo 401(k) plans are much easier and less expensive to operate. In fact, Jeremy can serve the roles of employer, employee, plan participant, plan administrator, and plan trustee. Serving the role of employer and employee allows him to contribute up to $46,000 per year to his account (or $51,000 if he’s over age 50). If Jeremy’s wife works in his business, she can participate as well and contribute up to another $46k each year.

The Downside of Checkbook Control

You may hear about potential problems of checkbook control, such as recordkeeping and legal compliance. Firstly, the only reporting required for a Solo 401(k) is annual filing of Form 5500-EZ, and it is only required once plan assets exceed $250,000 in value. There are plenty of companies who will prepare this form for about $300.

The issue of checkbook control legal compliance is quite simple. All self directed accountholders and participants must avoid prohibited transactions. This requirement and responsibility rests solely on you as accountholder/participant regardless of whether you have checkbook control and regardless of whether you are using and IRA or Solo 401(k). See an elaborate explanation here.

The facts are that when using a self directed, self administered, self trusteed Solo 401(k):

• meeting the reporting requirements is simple, and it’s inexpensive to have Form 5500-EZ prepared for you
• there is no special or unique risk of legal noncompliance that would otherwise be eliminated by using a custodian

Conclusion

In my opinion, a Solo 401(k) where the same person serves all roles involved is the simplest, most effective and direct way for that person to self direct their retirement plan investments. It opens doors to the most flexible options possible. This allows for investment into foreign assets, investment clubs, tax liens, precious metals, and many other investments that some custodians optionally refuse.

So if you’re self employed (through your own Corporation, LLC, or even Sole Proprietorship) and you have no full time employees, the rules are bent in your favor with a Solo 401(k) – arranging and utilizing checkbook control is easier.

Some might say the health care bill is a distraction from what’s next. Peeling back the layers of the politicians’ never-ending string of nationalizations reveals that they may just be ramping up.

Believe it or not, the self-trustee Solo 401k may hold the key to empowering freedom-loving Americans to finally defeat government takeover of private industries.

Enjoy the video, as it contains a valuable game plan.

Watch the Video Now