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Question for Diane

snowbank

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I just spoke with my dad's money manager about setting up my Sep-IRA with him. He knew of what I did through my dad(I'm a professional poker player), and thought maybe my accountant could have recommended a Solo 401k, because I would be able to contribute as an employer, AND as an employee. What's your thoughts on this?
 

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Diane Kennedy

Bronze Contributor
Aug 31, 2007
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I just spoke with my dad's money manager about setting up my Sep-IRA with him. He knew of what I did through my dad(I'm a professional poker player), and thought maybe my accountant could have recommended a Solo 401k, because I would be able to contribute as an employer, AND as an employee. What's your thoughts on this?
The Solo 401(k) is a great way to go because:

(1) You can contribute more, up to $44,000 per year ($49,000 if you're over 50)
(2) You can completely self-direct the funds. (ie...use them for business start-ups or real estate investing)
(3) Not subject to UBIT if you do real estate investing - explanation of this follows.

You can invest self-directed pension plans into real estate and use the leverage of financing. So, as an example, let's say you buy a building for $100,000 and your SEP-IRA puts half down ($50,000) and your SEP gets a loan for the other half. You flip the property for $150,000 for a gain of $50,000. Because half of the building was financed, it's subject to Unrelated Business Income Tax (UBIT) on that portion of the gain. ie...even though it's in a pension plan, half of the gain is immediately taxable. That's one of the challenges of investing with your self-directed pension into real estate.

BUT the Solo 401(k) is EXEMPT from UBIT. So, same scenario - half of the $100K property is financed. You have $50K gain. ALL of it is tax-deferred.

Now make it even better. You can instead have a Solo Roth 401(k). So, for all the people who have too high income to get into the Roth tax-free game, you can do it with this type of structure. Then your gains are tax free....forever.
 
OP
OP
S

snowbank

Platinum Contributor
Speedway Pass
Aug 10, 2007
1,383
3,035
880
Austin, TX
The Solo 401(k) is a great way to go because:

(1) You can contribute more, up to $44,000 per year ($49,000 if you're over 50)
(2) You can completely self-direct the funds. (ie...use them for business start-ups or real estate investing)
(3) Not subject to UBIT if you do real estate investing - explanation of this follows.

You can invest self-directed pension plans into real estate and use the leverage of financing. So, as an example, let's say you buy a building for $100,000 and your SEP-IRA puts half down ($50,000) and your SEP gets a loan for the other half. You flip the property for $150,000 for a gain of $50,000. Because half of the building was financed, it's subject to Unrelated Business Income Tax (UBIT) on that portion of the gain. ie...even though it's in a pension plan, half of the gain is immediately taxable. That's one of the challenges of investing with your self-directed pension into real estate.

BUT the Solo 401(k) is EXEMPT from UBIT. So, same scenario - half of the $100K property is financed. You have $50K gain. ALL of it is tax-deferred.

Now make it even better. You can instead have a Solo Roth 401(k). So, for all the people who have too high income to get into the Roth tax-free game, you can do it with this type of structure. Then your gains are tax free....forever.
are there any disadvantages to the solo 401k compared to the sep ira? should i be wondering if this accountant is right for me if this would have saved me a lot more on taxes?

also, i asked him about investing sep ira money in real estate and he said i couldn't do that.
 

Diane Kennedy

Bronze Contributor
Aug 31, 2007
795
209
49
are there any disadvantages to the solo 401k compared to the sep ira? should i be wondering if this accountant is right for me if this would have saved me a lot more on taxes?

also, i asked him about investing sep ira money in real estate and he said i couldn't do that.
First part of the question: Not everyone can qualify for a Solo 401(k). The only owners can be husband and/or wife. There can't be any other owners. And the only employees can only be husband and/or wife. There can't be any outside employees. Typically, I'm trying to find a way to turn employees into independent contractors so that the owners can qualify for the Solo 401(k). It sounds, though, like you're a perfect candidate for this.

As far as not knowing you could invest SEP $$ into real estate.... I'm sorry you got bad info. I wish I could say that was the first time I'd heard of it, but it's amazing how many people, professionals included, who don't know you can. it's not a new rule. This has been something you could do for decades!! I wrote a book on it "The Insider's Guide to Tax-Free Real Estate Investing" and did a radio satellite tour on it. I bet 90% of the interviews...radio hosts who were financial "specialists" questioned whether it was legal. My editor at Wiley (the publisher) specializes in investment books and she had never heard about it either until I wrote that book.

There are some very special rules about HOW to do it. But, follow the rules and you'll be fine. LMK if interest and I'll start a thread on how to invest with pensions into start-up businesses and real estate. Real Estate has been done so much (by my clients) that it's a slam dunk. The strategies I'm really investigating/creating now are how to take your business, spin off IP (Intellectual Property) and then have that owned by your self-directed pension. You can create tax-deferred or tax-free income streams pretty easily this way.
 

EasyMoney_in_NC

Contributor
Sep 9, 2007
399
31
31
Wilmington NC
There are some very special rules about HOW to do it. But, follow the rules and you'll be fine. LMK if interest and I'll start a thread on how to invest with pensions into start-up businesses and real estate. Real Estate has been done so much (by my clients) that it's a slam dunk. The strategies I'm really investigating/creating now are how to take your business, spin off IP (Intellectual Property) and then have that owned by your self-directed pension. You can create tax-deferred or tax-free income streams pretty easily this way.
Please do start a new thread, would love to hear about this!
 
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snowbank

Platinum Contributor
Speedway Pass
Aug 10, 2007
1,383
3,035
880
Austin, TX
The Solo 401(k) is a great way to go because:

(1) You can contribute more, up to $44,000 per year ($49,000 if you're over 50)
Is it true that I can contribute both as an employee and employer? So let's say I can contribute up to 20% currently. Does this mean I could contribute 40% going the solo 401k route?(20% as employee and 20% as employer)
 

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