So You Can…

Self Directed 401k

A Self Directed 401k, (also known as a “Solo K for the self-employed) is a 401k plan setup for your company. As the Manager of the company, you can act as the Trustee for the Plan’s monies. Like a Self Directed IRA, the self directed 401k enables you to self direct your investments, but in this case it is on behalf of your 401k. The investments can be in real estate, other companies, or your own C-Corp.

Our Self Directed 401k

The use of this type of structure enables you to have investment and checkbook control over the 401K. This eliminates custodian involvement and hassles, regardless of the investments. How does this differ from other 401k plans?

1. Most 401K plans do not permit direct ownership of real estate or other non-traditional investments, so indirect investment via the self directed 401k is the only choice. When a self directed 401k sells real estate or other investments, the capital gains are deferred through the 401K, like any other 401K investment. The headaches of 1031 exchanges are never necessary.

2. Ownership of the property in a self directed 401k allows you, as manager, to have direct, hands-on control of investment decisions over the 401k assets, including control of the checkbook. Custodian involvement and hassles are eliminated, regardless of whether the investments are in securities, real estate or other assets.

3. A self directed 401k can use its assets as a down payment for a real estate investment purchase with the 401k financing or borrowing the balance. The use of debt financing for real estate investment is not subject to UBIT tax.

4. Since you control and handle all the 401k transactions and act as the “custodian”, then there are no expensive annual fees. Litigation threats which accompany investments such as real estate are substantially reduced. This is done by isolating the investment inside a title holding company or Trust holding company, and away from the rest of your 401K funds and estate.

The structure continues to provide deferral of income and gains inside the 401K. If the company sponsoring the plan generates income, then you can make contributions of up to $49,000 annually to the 401K plan ($16,500 for employee and $32,500 for employer for the year 2011).