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Do you work for your 401k or does your 401k work for you?

Discussion in 'Asset Protection/Taxes/Legal' started by TKDTyler, Nov 16, 2017.

  1. TKDTyler
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    TKDTyler Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    *Disclaimer: I am not in any way shape or form a license tax professional. I am in no way advocating dodging tax laws – this serves as an informatory post and use of the information should be consulted between you and your own tax professional*


    Traditionally, 401k’s have been a slowlaner’s way to retire. Invest for 40 years and in turn, you can retire at the age of 60.

    The $18,000 tax deferred income is the biggest benefit, but your capital is unable to be withdrawn and touched without penalties. The only access is through a loan taken out on the account which is limited to 50% of your account balance.

    What would you say if you could save an extra 10% to 30% of your net income? What if that doesn’t limit the amount of working capital at all? On top of it, what if that money was accessible for most investments of your choosing?


    Enter the Self-Directed Solo 401k


    What is a Self-Directed Solo 401k? It is two types of 401k accounts squeezed together.

    First is the Solo 401k – this option is available for sole employee business owners. This is great for those who run small to medium ecommerce businesses / hire contractors to do jobs rather than have staff on payroll. How does it work?

    As with any 401k, you can place up to $18,500 of your personal income, tax deferred.

    But because you are also the owner of a single member business, you are allowed an employer nonelective contribution (aka profit sharing) of 25% of your net profit.

    The maximum contribution of both cannot exceed $54,000. Ultimately, because you run your own business, you can gain an additional $36,000 deferred from taxes.​

    Which brings me to the next plan: The Self-Directed 401k

    Typically, a 401k account is granted by an employer and managed by a large investment firm (ex. Transamerica). Money is then split between stocks and bonds and given a steady ROI over many years. Hands off. Hands free. Slowlane paradise.


    When you elect to create a self-directed 401k, instead of running your retirement account through a firm like Transamerica, you create your own account through the bank of your choosing and ultimately are responsible for the investments in which the money flows into.

    Put the two together and you get up to $54,000/year, tax deferred account which you control the investment opportunities that are not limited to just stocks and bonds.

    And you get to lump sum it on Dec 30th if you choose to do so. Working capital throughout the year in tact.​

    Why is this beneficial?

    The Commandment of Control. The IRS does not say what you can invest in, only what you cannot invest in. Which means we are free to use tax-deferred dollars to fund investment opportunities. Opportunities that can make our capital grow much faster than a traditional 401k.​


    How can we grow if our cash is tied up in a 401k account? Won’t it be penalized?

    This is the beauty of a self directed solo-401k – there are two options available or using capital:

    1. Just like a traditional 401k, you can take out a loan up to 50% of your total account balance. This money is paid back to yourself on a schedule with interest. No tax penalties. 50% of your capital is freed up, and in the end, your investment account grows due to interest.

    2. The applications for entrepreneurs are staggering. Investments can be, but not limited to, stocks, bonds, options, real estate, and crypocurrency. This is how we can get past not accessing a 401k account until after 60 without tax penalties.
    This website paints a pretty good picture about what you cannot invest in: https://www.mysolo401k.net/prohibited-transactions-solo-401k/


    For example, I run an ecommerce business and have a slowlane job:
    Slowlane Income: $120,000 | Business Net Profit: $80,000 | Total Income: $200,000

    I created a spreadsheet that I will attach to this post. Below you can see the difference between being taxed and using a solo-401k.

    [​IMG] [​IMG]


    As you can see, by injecting $38,500 into a tax deferred account, I can save from $14,000 in tax dollars, but I also drop my income backed, saving me an extra 5%.

    Ultimately, I pocket an additional $24,360 that I would have paid in taxes. The only drawback is that I lose $14,000 in working capital, but that is offset by the fact I can take up to $19,250 out as a loan from my 401k.

    Then there will be an extra $19,250 in the account to use towards other investments.

    My plan is to use the first 50% as a loan to provide working capital for inventory while lowering my tax bill/tax bracket. Once my cashflow can cover all capital costs through Q4, I can use what money has built up as inventory capital, as a down payment on a home with a 10 year repayment.

    Additionally, as my account grows, I can continue to use the other 50% towards investments, probably crypto-currency, and ideally ending up in investment real estate.


    Make your money work for you, not against you!


    *Again. I am not a CPA. With anything regarding tax laws, it is wise to speak to your own tax professional to get a better understanding of what is and is not legal.*
     

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  2. luniac
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    luniac Gold Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    lol im so glad i never made a 401k
     
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  3. CareCPA
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    CareCPA Gold Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    Why? Given the choice at the end of the year of giving more money to the government, or keeping it for myself, I will keep it for myself every time. I'll get old and use it eventually - if I give it to the government I may never get it back.
     
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  4. lowtek
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    lowtek Platinum Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    I agree with your sentiment, it's always better for me to keep my money rather than let the government waste it.

    Putting your money away for decades, where it will be inflated away to nothing, doesn't seem like the same thing as keeping it.

    IMHO a far better use is to roll that money into cash flow producing assets (i.e. your business or a second business) and just find other creative ways to take deductions to mitigate government theft to the extent possible.
     
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  5. Yoda
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    Yoda Gold Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    I'm not particularly a huge fan of the 401(k), but it has some great benefits.

    For those who are slowlane and not leaving it, it might be the only "forced" savings they ever embark on. The fact they can't touch their money until 59 1/2 is a good thing because, otherwise, they may actually just spend the money and we'll be spoon feeding them forever.

    I'd rather your basic Tom and Mary save something, anything, rather than nothing.

    Outside looking in, we all know it's best to pay yourself first, especially payroll deducting, so it's not "missed" as much. But the average American doesn't quite get it the same way.

    That said, I love the topic, overall, @TKDTyler
     
  6. luniac
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    luniac Gold Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    cause when my career started i knew nothin bout 401k's, so i just said screw that noise and didn't enroll. I saw it as less of my paycheck in my pocket and i didn't make that much already.
    plus i was just beginning my fastlane journey and naively thought id be rich in 2 years LOL
     
  7. TKDTyler
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    TKDTyler Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    Exactly. It is just another way to keep more of your money as investment capital rather than government income. It is a no brainer to have an extra 15% of my income as investment capital rather than flushing it down the government toilet.


    The Average American would rather let it sit and not be touched. Many would not be very informed investors and would end up losing their saving.

    That said, the SD 401k offers entrepreneurs additional capital that is essentially tax-free, liquid investment cash that can change and adapt towards your short term and long term goals.
     
  8. GlobalWealth
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    GlobalWealth Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    As the OP noted, but many people don't realize, you can use your retirement funds for investing in your business as well as other private investments.

    If you have a SD IRA it 401k, you can invest in almost anything;

    Private businesses
    Real estate
    Derivatives
    Precious metals
    Hard money loans
    Foreign stocks or bonds traded on foreign exchanges
    Or nearly anything else you can come up with

    Limitations are no self dealing, meaning you cannot see immediate personal gain from the retirement funds, no collectibles, and no transactions with parents, grandparents, kids or grandkids.

    Otherwise your creativity is free to roam.

    Sent from my VTR-L29 using Tapatalk
     
  9. MidwestLandlord
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    MidwestLandlord Legendary Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    You can trade options in these, and that is fastlane. (Can't trade naked options, but there's ways around that, like very wide credit spreads)

    Save 15% of my income from taxes AND use that money to trade options? I'll absolutely be adding this to the money tree side of my fastlane.

    Plus I can buy real estate with it. More complicated transactions might be prohibited (I gotta learn what the rules are) but buy and hold rentals would be easy. That can be fastlane too.
     
  10. GlobalWealth
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    GlobalWealth Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    Actually you can sell naked puts if you properly set up your SD IRA or 401k.

    Sent from my VTR-L29 using Tapatalk
     
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  11. TKDTyler
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    TKDTyler Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    The beauty is the flexibility of the account. Traditional 401k, you have to let your cash sit in stock and bonds for years before you could save anything remotely close to buying real estate.

    With the SD-401k, the gains are in the accelerated growth due to being able to manage your own account. And from there, being able to quickly switch between liquid capital and various types of investments. Trade options for 1 year, make your gains. Use the gains to buy rental property that cash flows positive from day 1. All with money you'd never see or touch anyways.
     
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  12. GIlman
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    GIlman Still Gilman Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    One other perk of assets held in 401K is pretty strong liability protection from creditors (except ex spouses in the form of child support and the IRS for taxes).

    Depending on your state you can be shielded from someone raiding your IRA savings as well. In arizona the amount is unlimited. Check your state for their laws. https://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf

    If you have a suit filed against you or go bankrupt these assets can be shielded from attachment. This alone makes these very very valuable tools for securing your future.
     
  13. GlobalWealth
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    GlobalWealth Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    If you hold your IRA or 401k assets offshore you get an additional layer of asset protection.

    Sent from my VTR-L29 using Tapatalk
     
  14. TheOwl8
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    Self-directed 401Ks definitely offer some advantages, but the sentiment that you can open the self-directed 401K and you are good to go investing in just about whatever you want is not the reality. It is not that simple.

    If your retirement account is engaged in what the IRS deems a "prohibited transaction", prepare for major tax penalties. Do you know all of the "prohibited transaction"? I don't, and I'm a CPA.

    I am of the belief that the only time a business owner should contribute to a retirement account is when they literally have so much cash that they don't know what to do with it or how to get a return on the cash. Locking away cash for 30 years in order to save 30 cents on the dollar is a luxury that should only happen when the business has no other use for that cash.
     
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  15. MidwestLandlord
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    MidwestLandlord Legendary Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    I assumed they had to be cash secured, as using margin is considered "taking a loan" which is prohibited. I've got some learning to do for sure.
     
  16. GlobalWealth
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    GlobalWealth Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    Not exactly. You're account must be self directed with an LLC as your sole asset with you as LLC manager. Then the LLC can trade like any other account.

    Sent from my VTR-L29 using Tapatalk
     
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  17. garyjsmith
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    garyjsmith Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    Timely conversation as it's open season with employers. Everyone at work is jumping on the bandwagon, signing up for IRAs through the company, and I'm looking for answers on how to use it to my advantage (if possible). Employer is matching up to 3%. Not afraid to admit that at present, I have much to learn on the topic, if it's worth the effort to understand.

    Is there a resource you'd recommend that offers a quick ramp up? Will gladly pass rather than blindly invest.
     
  18. Taxman
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    Taxman New Contributor FASTLANE INSIDER

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    If you use your imagination, you will see that the Self-Directed 401K is a fantastic tool in your belt. It is better and has fewer restrictions that a SD IRA.
    I defer a nice chunk of my business income into my 401K, reduce current taxes, and then invest in RE flips where I offer seller financing and use private money financing to buy with excellent cash flow. My buy & hold properties are too valuable (with the depreciation deduction) as a tax shelter to hold in my 401K.
     
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  19. TKDTyler
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    TKDTyler Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    That's a great way to think about using SD401k. I haven't thought about using it as a mean of financing, but it is a great alternative route that is already integrated within another business model you have going for you. Great thinking!
     

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