THE SELF-DIRECTED 401 TRUST




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Introduction to Self-directed 401 Trusts

The Self-directed 401 Trust, is also known as a "one-participant 401(k) plan". It's much like a traditional 401(k) plan, however it is only available to business owners with no full-time employees other than that person and his or her spouse. As you will see, while these plans have the same rules, requirements and protections, far more flexibility is available to the owner-employee than with the traditional 401(k) plans you may be familiar with.

Why it's important for real estate investors

  1. Control your money. As the Trustee of your Self-directed 401 Trust, you will:

    • Decide who, when and how much to invest your 401 funds

    • Determine when to make distributions to yourself

  2. Maximize your capital for investment in cash-flow/wealth-building Real Estate (private placements fit best)

  3. "Retire" from your day job (or not -- do whatever makes you happy)

Self-directed IRA vs Self-directed 401 Trust

  1. Self-directed 401 Trust advantages

  2. UBIT / Unrelated Debt Financed Income exception when leverage is involved

    • Single-family

    • Multi-family private placements (REPP)

3. Loan provision (currently $100,000 as part of the recent CARES Act)

4. Much higher contribution limits (2019 $62,000, 2020 $63,500)

Tax-Optimized Wholesaling

  • Contributions to a Self-directed 401 Trust are available to offset self-employment income. The maximum contribution for $62,000. for TY2019 and $63.500. for TY2020 (per spouse). The first $25,000. is on a dollar for dollar basis of self-employment income, the balance is on a profit-sharing basis at 20-25% of net self-employment income.

  • This is akin to moving funds from your left pocket (taxable Form 1040) over to your right pocket (non-taxable 401 Trust)... HOWEVER, unlike most business deductions, you did not have to "spend" it on expenses, AND, you still control the capital for investment in real estate.

Private Placements

No UBIT/UDFI for leveraged investments. The Self-directed 401 Trust is the ONLY vehicle under the tax code that is given this status.

What's in it for you?

  1. Tax-leverage provided by the Self-directed 401 Trust is significant in two ways:

    • GETTING STARTED: Additional 30-50% investable capital depending on your tax bracket and state of residence

    • ONGOING EXITS: Tax rate = 0% within the Trust vs. 25% - 40% for non-Self-Directed 401 Trust investors

  2. Loan provision (currently $100,000):

    • Repayment over 5 years (quarterly), 1% over prime rate

    • A personal loan that can be used for any purpose: membership/professional fees

  3. At least 2X retirement lifestyle (compounding for 4 year minimum, distributions commence in Year 5)

  4. Massive wealth-generation for your family's net worth

    • $350,000 account, 20% IRR, 4-YR Compound, Distributions begin YR 5, "Retirement" = $100,000 of Annual After-Tax Income*

    • $32,173,986 = opportunity COMO (Cost-Of-Missing-Out) of foregoing the initial tax-leverage

    • $15,000,000 = Legacy net worth to your heirs AFTER estate taxes and Roth conversion taxes

*This is a "Sample Illustration, For Discussion Purposes Only"