[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.

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

If you’re looking for a tax break this year, there’s still time to open a Solo 401(K). But do your research and seek experts to help you understand the plan, how to manage your account without the need for a custodian which amounts to extra fees, and how to transfer your existing new plan. You’ll find the options for investing and maximizing your contributions are plentiful but the clock’s ticking—you only have until December 31st to open one for 2009.

For the self employed, a fantastic development has occurred over the past few years – the Solo 401(k). One distinct advantage of the Solo 401(k) over an IRA is that it is not subject to paying UBIT on profits from financed real estate. Eliminating UBIT by using a Solo 401(k) eliminates the need to file a return (Form 990-T) as well as the accompanying tax. Sound pretty good so far?

The difficulty in recent times has been obtaining nonrecourse financing. The leader of NR financing in the Self Directed IRA industry for the past few years has been North American Savings Bank. Last year, they took the familiarity of IRA lending and applied it to Solo 401(k). Unfortunately for many Solo(k) investors, this has only been available to plans who choose to name a custodian as trustee of the plan. Qualified plans (which is what all 401k plans are) are different than IRAs in that they are not required by law to name a custodian (bank or trust company) as trustee of the plan assets. Investors who establish Self Directed Solo 401(k) plans that name themselves as trustee for simplicity have not been able to readily obtain mortgage loans for their Solo (k) plan from NASB.

Well, as of this month, NASB has expanded their loan products to include a nonrecourse loan program for self trusteed Solo 401(k) plans. I caught up with Matt Allen to discuss the great news on UNLIMITED RETIREMENT ACCOUNT® Radio. The skinny is that the program is almost identical to the IRA lending program. If you aren’t familiar with their guidelines, check out the URA Radio show podcast as it become available soon.

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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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1. Be eligible for a Solo 401k in the first place. This means that you have to have self employment activity (such as Schedule C income on your 1040 or own a business), and you have to have no employees at any businesses in which you or your spouse have significant ownership. (An “employee” is somebody who works over 1000 hours per year for your business and receives a W-2).
2. Add me on Facebook. Go to my Facebook profile to add me to your friends. If you don’t have a Facebook account, just create one. It’s very simple and easy, and it will help you stay connected for updates, news, events, etc.
3. Write a brief explanation of the most powerful business or investment opportunities in our current recession. Explain the “how” and the “why” as much as you can, but be direct and to the point at the same time. Submit it in a comment on this blog post (the one you’re currently reading) OR post it to the “wall” at the bottom of the Facebook Solo 401k Contest page. I’ll review all entries, and the person with the best idea will get a Solo 401k setup for them by Nabers Group with the entire establishment fee waived.

Submission Deadline: March 15, 2009

Value: $210,585

The math: Over the past 10 years, most stock indexes have produced a return of approximately 0%. With a Self-Directed Solo 401(k) plan, the accountholder can buy real estate, gold, stock in private companies, and loan money to individuals or corporations. Surveys have shown us that over 80% of our Solo 401(k) clients have a target return of investment of 12% per year or more. An investor with $100,000 of existing funds who earns 12% per year for 10 years will generate a profit of $210,585.

We’ve never done this before, and I don’t know if we will ever do this again. Now’s your chance – start working on your entry today!

* The value is based on the potential profit you could earn and will vary based on your investment decisions. With a Self-Directed Solo 401(k), it’s up to you to find and choose investments, and only you will decide how profitable and valuable this investment vehicle will be.

We’ve never done this before, and I don’t know if we will ever do this again. Now’s your chance – start working on your entry today!

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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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After being asked “What’s the difference between your Solo 401(k) and one offered by a custodian?” for the umpteenth time in the past few months, I figured it’s about time to write a post about it.

Why custodians exist

IRAs are governed by section 408 of the Internal Revenue Code.  There they are defined as a retirement savings account trust where the trustee is a bank or a trust company (a trust company is basically a bank that holds assets but doesn’t make loans). This role is often referred to as custodian. Self directed IRAs have been in use for decades, and so self directed IRA custodians have been around for decades as well. For IRAs, there is no choice… you must hire a custodian to serve as trustee to your IRA.

The trustee role of a self directed IRA

The term “custodian” comes about in IRC Section 408 because when a bank or trust company serves the trustee role, they are not being trustee in the traditional sense. Usually the trustee of a trust makes decisions and has discretion over handling the income and assets of that trust. With an IRA, this normally isn’t the case. The bank or trust company is not making decisions or providing any other services other than custody (holding assets as an intermediary), and that’s why they are usually referred to as “custodian” – because they don’t provide any services other than custody.

Solo 401(k) is not required to have a custodian

Internal Revenue Code Section 401, which governs all 401(k) plans, does not issue any restrictions on who can serve as trustee. Not too many people have figured this out yet because the self directed Solo 401k wasn’t available until 2006. The benefits of a Solo 401k (such as higher contribution limits and reduced administrative requirements) come from the fact that you can play multiple roles. You can make higher contributions by serving the roles of employee/participant and employer. But it doesn’t stop there. The participant can also serve as administrator and trustee.

The role of administrator for a Solo 401k

An administrator simply keeps records. For a self directed Solo 401(k), a diligent investor is already keeping the records that an administrator would. These include bank statements, brokerage statements, copies of real estate purchase contracts and leases, and generally whatever paperwork accompanies a transaction of the plan. Since the self directed investor should already keep these records, it isn’t necessary or beneficial to hire another company to also keep the same records. Hiring an administrator for a self directed Solo 401k simply introduces unnecessary, undesirable fees.

The role of trustee for a Solo 401k

The trustee is simply the person or company who handles the transactions of the Solo 401k trust. As an investor, if you were to hire a custodian, which is optional, they will require that you submit an investment direction letter for each transaction. With a “self-trustee” Solo 401k, you would simply execute the transaction yourself directly rather than instruct a third party and then deal with their delay in processing and transactional fees.

The myth of additional custodian services

Prohibited transaction protection. Most custodians claim to protect the participant from prohibited transactions. This claim is contradicted by every custodian account application I’ve ever seen. In the custodian application, the participant must agree to hold the custodian harmless from any non-compliance with tax code (including prohibited transactions), and the terms of the application usually go to the extent of specifically saying that the participant is solely responsible for prohibited transaction avoidance. As you may already know, most written agreements contain a clause that says “this written agreement supersedes and takes precedence over any oral claims, promises or agreements”.

Miscellaneous services and support. Many customers of custodian companies are unpleasantly surprised when they attempt to get answers to questions in using their self directed IRA or Solo 401k. Questions are usually met with a statement such as “We don’t give tax, legal, or investment advice. You should contact an accountant, attorney, and/or investment advisor.” Some custodians offer directories of such professionals, but these directories will usually allow anybody to sign up to claim to be a knowledgeable advisor as long as they pay a fee or attend a brief seminar… defeating the purpose of the directory. Truly knowledgeable and experienced professional advisors are very hard to find. Many investors pursue self education after failing to find qualified professional advisors. Unfortunately, most custodians only offer “account opening” education… also known as marketing. Those who go beyond scratching the surface sometimes charge thousands of dollars for CD & DVD courses or live seminars that offer no ongoing interactive support.

How a Solo 401k from Nabers Group is different

1. You are the trustee and administrator. We were the first self directed retirement plan provider to offer a self-administered, self-trustee Solo 401k plan. This eliminates the percentage-based fees and transactional fees that can make a custodian’s Solo 401k cost thousands of dollars per year. With us, the only thing you’re missing out on is transactional delays and costliness.
2. We provide actual support. We have published volumes of information about real world, rubber-meets-the-road self directed investing topics, and we continue to add to our customer information archive. Contact us with any questions. 90% of the time your question has already been addressed by materials in our archive, and we’ll send over a link or attachment to those materials. If your question has never been addressed, we’ll publish materials on the issue and/or invite you to call into our internet radio show, Unlimited Investing Radio.
3. Unrestricted investment platform. While it ironic, custodians who market their willingness to hold “special” or “alternative” assets often have company policies restricting legally allowable investments. Examples include denying a transaction because they think it is a prohibited transaction even if it is actually not as well as outright disallowing types of investments they don’t want to have to deal with such as international real estate.

Comparing costs

Custodians usually offer Solo 401k setup for a very small fee in order to attract new accounts. But don’t be fooled – read the ongoing fee disclosure and estimate your future costs yourself. There are often quarterly, biannual, and annual fees – including percentage based fees, transactional fees, periodic per asset fees, and sometimes even exorbitant fees for special assets such as international real estate. Custodian customers are often very surprised months later when they read about the fees that were taken out of their account.

With us it’s impossible for you to find surprise fees because you are the trustee of your own Solo 401k plan, and we don’t have access to your assets or funds. Our fees are very straightforward. We have one plan establishment fee, and it pays us for the document preparation. It is higher than a custodian plan establishment fee, but as long as you are going to be alive and invest for 3 or more years, our Solo 401k is much less expensive than a custodian’s. The only other cost you can expect from us is a small annual notification subscription fee. This is mandatory, and it pays us to notify you of any law changes that affect your Solo 401k plan documents. All things considered, our Solo 401k plan is the most flexible, most capable, and least expensive self directed retirement plan in existence.

With all of the unique benefits that a Solo 401k offers over the self directed IRA, I believe that (as a general rule of thumb) eligible self employed persons should always pursue the Solo 401k rather than the self directed IRA. With our plan establishment, you’ll be entering into an expert-supported relationship that will make you better equipped to achieve truly extraordinary investment results.

Recommended further reading: Why you should want to self-trustee your Solo 401k plan [coming soon]

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