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/2010/11/11/a-major-improvement-to-make-things-easier/ http://www.solo401k.com/2010/11/11/a-major-improvement-to-make-things-easier/#comments Fri, 12 Nov 2010 05:12:19 +0000 Jeff Nabers http://www.solo401k.com/?p=297 Exciting news – we’ve just started implementing something that makes setting up a Solo 401(k) a much faster and easier process.

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!

What is a participant loan?

A Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value with the following terms:

• To be repaid over an amortization schedule of 5 years or less
• Regular payments no less frequently than quarterly
• At a reasonable rate of interest… generally interpreted as prime rate + 1%

Such a loan may only be made in accordance with the Solo 401(k) plan documents. While most plan documents disallow this type of loan, the Unlimited® 401k offered by my company does allow it.

Under what conditions is this allowed?

Any. As long as the plan documents allow for it & the proper loan documents are prepared and executed, a participant loan can be made for any reason.

When is this useful?

This can be useful when someone is thinking about distributing money out of their Solo 401k plan for some reason. I recently talked to a man who was going to distribute his 100k IRA to pay for finishing the repairs of 2 fixer upper houses. After we spoke, his strategy was amended to instead:

• Setup a Solo 401k plan (adopted by his business) and transfer IRA funds into it
• Take a participant loan of $50k
• Use the loan proceeds to finish rehabbing Property #1 (which was owned personally free & clear)
• Do a cash out refinance on Property #1 once rehab is complete
• Use refi proceeds to finish rehabbing Property #2 & pay back the Solo 401(k) participant loan

In his situation, it made sense to pull some equity out of Property #1 to pay for the completion of Property #2 (and the early repayment of the participant loan) because the rental income (upon completion) of Property #1 covered about 350% of its new loan payments.

The result of the new strategy

• Avoided IRA distribution
• Avoided $35,000 in distribution taxes
• Paid participant loan back within a few months
• The rental income of Property #1 will payoff its mortgage within 6 years (with maximum principal reduction payments)
• Left $100k in his retirement account for maximum tax deferred growth

There are many other common uses for a Solo 401(k) participant loan. If a person wants to make a <$50k investment that would otherwise be a prohibited transaction, they can just borrow the money and do the investment as an individual.

What other uses can you think of?

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