[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.

[Originally posted at JeffNabers.com]

Cliff notes version:

• I will be offering free one-on-one phone consulting to qualified people
• In order to make room for that, I will no longer be offering free consulting in the form of blog comment responses

Here’s the skinny >>>

I’m making some changes to how I focus my energy and how I am able to help you with your wealth preservation and wealth building, both inside a Self-Directed IRA LLC or Solo 401(k) and outside of retirement funds.

Here’s what these changes will do for you:

• If you are aimed down a path that is likely to succeed, we may get a chance to work together more intimately
• If you are aimed down a path that is likely to destroy your wealth and frustrate you, you won’t get my help

Let me explain…

The #1 biggest factor making an impact your wealth right now is inflation.

Some people are trying to “beat” inflation by taking bigger risks to hopefully get bigger returns that will be bigger than inflation.

For 95% of my readers, that won’t work. It won’t work because bigger risks increase the gains and the losses, and over the long term most people will have worse performance as a result of taking bigger risks.

Around 5% of my readers have maybe figured out how to get bigger returns by spending more energy on some sort of system or process that yields larger returns. Moving forward, I don’t think that will continue working either.

Why won’t aggressive investment strategies work in the future?

Well… they will work and they won’t work. They will work in terms of turning your dollars into more dollars. They won’t work in terms or actual value adjusted for inflation.

This is because there is no limit to the amount of money the Federal Reserve has, can, and will print.

You can go after a 15% return.

The Fed can create 50% inflation.

You can go after a 50% return.

The Fed can create 500% inflation.

The Fed can create 5000000000000000000000% inflation.

There’s no limit. And they have to print lots of money because it’s the only way the government can keep spending more money than it has. The government will keep spending until it collapses. And the Fed will keep printing money for the government until that happens.

This means that each month, more and more money will be stolen from you through inflation. Whatever savings and income you have, it will buy less and less.

That’s not stores and merchants screwing you over by ripping you off. It’s the monetary system ripping you off because you remain vulnerable and exposed.

My New Service

If you are interested in how you can become fully protected from dollar inflation, hyperinflation, or even currency collapse… I’m offering a free strategy session for a limited time.

This is really my dream come true to be able to get back to working with my clients one-on-one and helping them on a very personal, attentive basis.

So, it’s my opinion that the only way you could be headed for success is if you recognize inflation as the most powerful wealth factor impacting you, and if you know you must fix this before taking on any other wealth building objectives.

If you’re on the path to success, you can request a free strategy session.

The Path To Failure (& new blog comment policy)

I believe that right now, the surest path to failure is to focus attention and energy on anything other than inflation protection. So I won’t help you do that.

Effective immediately, I will stop offering free consulting in the form of blog comment responses. This means that if you are looking for help with…

• Structuring complex (potentially prohibited) transactions
• Trying to figure out UBIT implications
• Trying to structure a real estate deal

…then I won’t be able to help you because I will be spending all of my attention and energy on helping people with the more important objective of inflation protection.

You could structure the most clever real estate deal in an IRA LLC and then lose all of your wealth in our continued (possibly accelerating) economic and currency collapse.

I won’t help you do that.

Or you could become fully protected from inflation and be in position to survive and thrive in any economic circumstances.

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!

This is quite a simple concept so this post will be very brief.

• Our weak economy has brought very high inflation: as high as 13% over the past year.
• Future dollars are worth much less than dollars today.
• With a Solo 401k you can make tax-deductible contributions to your retirement plan in today’s dollars and pay taxes later in less valuable dollars.
• Successful entrepreneurs and self employed individuals can contribute $49,000 per year or more to their Solo 401k in 2009.

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While there are many people finding themselves more fearful than ever, there are others who are more excited than ever. Here’s why…

1. The rules of safety and courage have changed. Since the industrial revolution, employee-ism has surged. During this time, getting a job to work for somebody else was the safe thing to do. On the other side of the coin the risky, courageous act of working for oneself is what brings riches. As a result, each person has been faced with a choice to pursue either safety or riches. Part of what made employee-ism the safe bet for an individual is the stability of companies as well as what has become the largest store of non-real estate wealth in our country: holdings in the stock market. This year we have seen the rules of the game permanently changed. Our financial system is crashing, and trustworthiness has evaporated from corporate America and the financial services industry. Now working for yourself is no longer the courageous thing to do; it’s the safe thing to do.
2. Technology has brought immense power to everybody. Personal computers and the internet are now available to just about everyone. This has made some very expensive things become cheap or free. This has made it possible to do things that were previously impossible. There is no longer a need for every transaction to take place in a physical location. Needs and desires are able to be fulfilled online. In many circumstances, the large corporation cannot compete with the one-man shop. Today a person can start and run several businesses for little or no money. Taking something and creating or increasing its value has never been more accessible.
3. Arbitrage has never been easier to find and profit from. Arbitrage is the process of equalizing values. When two similar or identical assets can be bought at different prices in different markets, arbitrageurs show up to buy the assets in the lower priced market and sell them in the higher priced market. This act itself will usually bring the prices together in both markets. People have been “arbing” since the beginning of time. A farmer grows corn, and there is a town close by where he sells his corn. He discovers that in an other town further down the road, his corn will sell for more. He takes it there and enjoys increased profits for a period of time. In the book The 4 Hour Work Week, Tim Ferriss discusses geo-arbitrage. He describes this as the act of spending time in foreign locations that have a lower cost of living without reducing your standard of living – in fact he offers case studies in which people have largely upgraded their standard of living while maintaining or lowering their expenses. Anyone who can run their business over the internet will have the opportunity to enjoy geo-arbitrage. More change brings more arbitrage. We find ourselves in a time when change has never been more rapid or significant. Arbitrage has also never been more abundant.

I believe we’re moving into a time when self employment will replace much of the employee-ism of our recent history. Self employment today is quite different than just working a job for your own company. Owning a business in our rapidly changing, technology-armed environment allows you to disconnect your compensation from your time. Once your business can function independent of your personal time, you can develop additional streams of income and find ways to improve your businesses.

Every person, every government, and every company in the world is feeling the pressing of tremendous forces. Some of them include rising gas prices, rising food prices, rising real estate prices, falling real estate prices, unemployment, competition, etc. All of these problems create a demand for solutions. In some scenarios, large businesses with thousands of employees are too cumbersome to make changes as effectively as small businesses. As long as we continue to see change, there will be growing opportunity for small businesses to make the world a better place and profit in the course of doing so.

I believe self employment, responsibility, and self directed wealth management will become more common than the unnatural dependence of our recent years. There will be little opportunity for fraud and corruption once we have moved our wealth and power into our own hands.

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We have seen some unbelievable things over the past few years… especially the past few months. The only thing certain is that there is a lot of uncertainty ahead. If you haven’t already done so, right now I strongly suggest you watch the 30 minute condensed version of the film I.O.U.S.A. This film features David Walker, the former U.S. Comptroller General… aka the chief accountant of the government. He tried to fix the government’s financial problems, but Dick Cheney and others told him he needed to stop because they didn’t need solving. So he stepped down from his position and decided to prove to the world just how bad of shape our government really is in.

Today some people, including congressmen, are promoting some very extreme ideas. Some of these ideas involve the government “nationalizing” (or “confiscating” for those of us who speak directly) the assets of the people. Some plans even call for confiscation of retirement account assets specifically. In one scheme called the “Guaranteed Retirement Account” all retirement assets would be liquidated and handed over the Social Security Administration for investment management in a program that would provide a guaranteed return of 3% per year. This kind of silliness doesn’t need to be gratified by anything more than a brief response:

1. We’ve already seen how well the Social Security Administration manages money. It simply doesn’t. There is no money. There is no account. It just hands its income straight over to the general spending account of the government, and (not surprisingly) it gets spent!
2. Liquidating $16 trillion is impossible. It would crash the securities market entirely, and $16 trillion would not be withdrawn. If you started liquidating people’s retirement accounts alphabetically by name, those with names that start with letters n through z would receive little to nothing because of the price free fall created by the first half of the mass sell off.
3. The real world cost of living increases do not jive with published CPI figures, and there is often a discrepancy of much more than a few percent. A 3% return on investment would likely be a steady loss of principal when accurately indexing for inflation.

While we may not see that particular scheme enacted into law, it can’t be ignored that this type of solution is being considered. This government theft approach isn’t unheard of. In fact, Argentina just did it! Don’t forget that our government “confiscated” personal gold holdings in 1933… at least sort of. It was really more of a “government request” than a confiscation. An executive order was announced that requested that citizens show up to a Federal Reserve Branch within a month to sell their gold for $20 per ounce. The notable fact here is that not all the gold was turned in. According to author John Rubino, only 22% of the gold in circulation was actually turned in. Shortly thereafter, the gold price was set to $35 per ounce, thus devaluing the dollar by 41%.

It is not beyond possibility for our government to aim to take our wealth to pay for its financial problems. The difference between the gold confiscation of the 1930s and the threat of retirement account confiscation today is this: In the 1930s it was effectively voluntary to surrender your gold, while today over 99.9% of retirement assets are in the hands of custodians who are regulated by the federal government. While the 1933 confiscation was only 22% effective, a confiscation today would be 99.9% effective because of our unfounded trust in the financial services industry.

If a wealth “nationalization” plan were pursued, the outlook is grim for the overall population, but you can protect your wealth by simply taking direct possession of it. With an IRA LLC or a self-directed, self-trustee Solo 401k plan, you can legally hold your retirement account assets yourself directly. If an order were placed for you to surrender your retirement account assets, you could simply distribute them to yourself before the order deadline. In such a case you might have to give up 40% or more of your assets to taxation, but that is much better than losing 100%.

Again, I don’t like to come off as spreading “gloom and doom”, but unbelievable economic events are occurring left and right. The acts of the Fed (in concert with Fannie Mae and Freddie Mac) may have already devastated your first pillar of wealth – home equity. Don’t let further acts of foolishness destroy your retirement account.

Spend your time looking at the lighter side of things – investments that perform well; investments that you can understand and have predictable results. Just make sure that you are protected from losing your assets due to lack of optimal structuring. Whether you use a Self Directed IRA or Solo 401k to invest in a variety of alternative assets, make sure you set yourself up for direct possession of your assets.

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…our current circumstances. Rather than ignore the current economic problems, I choose to acknowledge this elephant in the living room during our Thanksgiving holiday.

We are bombarded with headlines like “What will fix our economic problems?” It is absolutely silly. The recession is the solution to the problem of the asinine acts of American government, corporations, and consumers. There is no galactic lottery that our country can win. We have to play by the rules of the game that we started. No person or government can perpetually spend more money than they earn. Such behavior can only be temporary and always leads to self inflicted unpleasantness.

I truly am thankful for our recession because it should help cleanse our government and society of self destructive behavior. We are now forced to return to thinking and doing things in the way that made the United States a prosperous country in the first place.

While the entertainment industry uses industrial psychology to lull us into vegging out at the cost of paying attention to advertisements all day long, it is a blessing for this economic crisis to wake us up and beckon us back to reality. We have become a nation of the most dependent people on earth. Dependent on:

• employment
• inefficient transportation
• inefficient sources of energy
• new clothes to make us look good
• new gadgets to make us feel good
• excessive amounts of food to comfort us
• the government to regulate everything we do

I see this economic crisis as a silent, involuntary re-declaration of independence. The illusion of safety and security being provided by employment is torn apart. People will learn how to create and sell valuable products and services to enrich themselves rather than an employer. As money is tight, sources of efficient energy and transportation will be embraced. Many of these sources have been there all along, but it sometimes takes household budgetary fear to try new things.

Many people will be forced to disrupt their pattern of indulging in food, gadgets, and clothes as means to find happiness… only to discover these indulgences are sometimes a source of unhappiness.

While we may let the government attempt to solve our problems in the short run, that is a path that eventually leads to the same undeniable fact that was the driving force behind the founding of our country: Wealth, safety, and freedom cannot be provided by any government… it can only be provided by the people themselves.

So become independent. Let’s turn this whole thing around. Over the past 30 years our population has consumed the natural and economic resources of the world. We’ve destroyed much of the wealth, prosperity, and resources of our existence… now let’s become a population that creates wealth and prosperity. The prosperity we desire can’t be won or handed to us – it must be created. Be thankful for the opportunity to be a part of what will go down in history as one of the most magnificent periods of mankind.

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