Thinking about a self directed retirement account?
We hope this will be one of the single most useful sites, and particularly this page, in helping you decide what account is best for your goals. We assist clients with IRA based accounts, 401(k) plans, basic self-directed accounts and full checkbook control accounts. It is the largest range of accounts offered by anyone in this arena. We do this so that you can feel confident that we are able to recommend what is best for you; no matter what that is.
CompleteIRA was started to provide people full checkbook control. We like it quite a bit. That said, it is not right for everyone. Since CompleteIRA is serious about helping people get the best account for their needs, we offer basic accounts as well. Still lots of control, but with much lower upfront costs. Read on to get a feel for which account is right for you. We hope to serve you in either case.
The best place to start is to write down the following:
- What do I want to invest in?
- How much time do I want to devote to growing my account?
- How much money do I have to work with?
We provide CompleteIRA clients ongoing access to an ever changing and growing list of investment opportunities and channels that offer both high returns and safety of principal - some of which require checkbook control - but most of which just need a basic account. If you have not looked it over, we highly suggest doing so. There are lots of other options as well. Another list can be found in our FAQ about half way down.
A few general rules; if you are buying tax liens, real estate options, or properties themselves, you should be thinking checkbook control. If you are thinking about buying and holding a TIC or having managed currency accounts, a basic account will be a valid option. Quick, high interaction investments like doing hard money loans require checkbook control. Slower paced, more passive investments usually need only a standard account. The more investments you have, the more checkbook control makes sense. If you just have a couple investments, then a standard account could save you money.
How much time you can devote is another key consideration. We have some retiree clients who work their account nearly like a side job... that kind of activity virtually screams for checkbook control. Other investors have only one or two alternatives they'd like to participate in (such as a currency trading account, or a piece of property they have found). Such activity would likely be most cost effective in a basic account. If an investor is going to be actively using their time and energy to find and act on investments the checkbook account is best. If the investor has one or two items they want to buy and hold for the coming years, a checkbook account may be excessive.
The final consideration is how much money you have to work with. It is not clear cut however... what this number means is mostly related to how you answered the last question. If you have the time, it doesn't take much money to make the checkbook account by far the better value. If you don't have the time, then you need to have a much larger account before the checkbook approach has merit. Please review the examples below for a better picture of what we mean.
A standard account, or a checkbook one?
Sarah has $40,000 in her IRA account, a full-time job and three kids. Sarah wants to be involved in something other than the stock market with part of her funds... what should she do? Well, spare time is off the list, and she definitely needs to be able to have her dollars work hard. With the amounts involved, let's say she wants to leave 1/2 in some mutual funds, and to be involved in some way with a local developer. She can loan the developer the funds for a fixed rate of return, and a small bonus on the final sale of the home. This would meet her goals, take less time than other alternatives, and be a good fit... If that is all true, she should get a basic account and skip checkbook control for now.
What if she has the desire to put some hours into it? Then perhaps she could option a couple lots, place ads, list them, and get them sold. Possibly making much more than if she loaned the money. If that is the case, she should get a checkbook account, as she has the time to make use of its advantages.
Scott and Julie have $210,000 between them in their old 401k plans and a couple of IRAs. They also have near zero time to do anything. If that is the case, managed accounts will be what serve them best, and that leans toward a basic account.
The tipping point for the checkbook control account is how many different managed accounts they have. If they had three that were not part of "the norm" ...say they had the secure options program, a currency trading account, and they loaned the rest out as hard money, then what? The custodial costs on the three "alternative investments" would be around $300-$600 a year, give or take. If they had the checkbook style account the custodial charges could be approximately $60. So generally in that situation (and certainly if they added further investments) the checkbook account would be the prudent option even if they didn't do anything that required it.
Tim has $10,000 and a dream. He'll research things and beat the streets. He's going to study real estate options and tax liens and buy and sell them until that $10,000 has another comma. Checkbook control gives him the power to act quickly. It gives him the ability to take advantage of opportunities and interact with sellers and buyers more naturally. Tim needs checkbook control starting yesterday.
Patty has $1,000,000 and a dream. She'll research things and then go to the beach. She's studied her options and has chosen to allow a good investment advisory handle the majority of her funds. They have selected several alternative investment specialists and traders to compliment the stocks Patty will invest in. Patty needs a basic account and some sunscreen.
IRA or 401(k)?
The "Roth 401(k)" is an amazing retirement account. Also known by the terms Uni(k), Solo(k), 401(k) w/ Roth sub-account, and a couple others they are all talking about the same thing. A 401(k) plan that allows the participant to designate contributed funds as either Traditional or Roth. These plans are very popular amongst the self employed for good reason. With no income limits, high earners can now contribute to a Roth account and the structure allows them to very easily put $40,000 a year in Roth funds away as a couple... approximately $60,000 of their first $80,000 in income could go into the plan (between the Roth contributions and a match their company would make). There is no better retirement account to rapidly put money in. (Before proceeding, we have a presentation on the Roth 401(k) v. the Roth IRA that many find helpful.)
Worth noting, profit sharing contributions are something our plans allow and are poorly understood by many. We happily assist our clients with this overlooked and valuable designation for enhanced tax savings.
The Roth 401(k) also has totally different and usually much softer penalties for accidental transactions in the account. IRA law is very unforgiving. If an error gets made, the account is distributed and subject to some very unkind taxation. 401(k) law is different; as it wouldn't be good if some large employer made an error and all their employees had massive tax bills as a result. That same, more reasonable, code applies to both large and small 401(k) plans. Giving single person plans the same enhanced safety.
The Roth 401(k), and this is really big for real estate investors, is not subject to UDFI Taxation. "Unrelated Debt Financed Income" tax is part of the UBIT (Unrelated Business Income Tax) code that both IRAs and 401(k) plans are subject to. This section of code has a very reasonable and somewhat interesting history we can talk about if you are curious. However, most of you are here to find out how to keep more of the money you make. Thus we proceed.
401(k) plans are not subject to the section related to income from debt, so all the people who are looking to buy a property and get a loan for it could easily save tens of thousands of dollars by using a 401(k) plan from us instead of an IRA. That is because the UBIT tax table is quite high. Think upper level trust rates. We wouldn't like to lose 40% of our debt-financed earnings to taxes... and we've never met anyone who would.
As an example; you put $100,000 down on a property, and have a loan for another $100,000. After five years you sell the property for a profit of $100,000. Keeping this very simple, 50% of the purchase was financed. So 50% of the profit is subject to the (roughly) 40% tax. That means $50,000 is subject to the tax and that tax totals approximately $20,000. Thus you only keep $80,000 of your $100,000 gain - if this was done in an IRA. If it had been sold in a 401(k) plan instead, you would keep the full $100,000.
That bit of knowledge has saved a great number of people some very serious money.
What if you already have an IRA account with real estate from somewhere else? The good news is two fold. One, if you have to use an IRA for real estate, you don't have to pay the tax if the property is debt free for at least a year before you sell it. The other good news (and by far the better news); you can move the property over from the IRA into a new 401(k) plan we create and then sell them. 401(k) plans are not subject to the tax, so even if you sell on day one, you keep all the gain.
The 401(k) allows you to take a loan against it without penalty. You'll pay yourself (your account that is) back with interest. If you need funds from an IRA, it'll cost most people the income tax on that money plus a 10% penalty. This difference has more than paid for some people to open accounts with us even on loans as small as $6000 that would have come from the IRA otherwise. You may take out funds for up to a 5 year term in most cases, a 30 year term in some, and for either 50% of the account value or $50,000; whichever is smaller.
So what about the IRA? It has its place. It's simpler and less paperwork for one. If you aren't going to be leveraging any property, don't desire the higher contribution limits or the lack of income restrictions, don't desire the ability to get access to some of the funds without penalty, and don't value the reduced penalties for errors in the plan then the IRA and 401(k) are on equal ground, so take the simpler option. We are not trying to sound down on the IRA. It is just more clear to describe the IRA by what it lacks in comparison. If you don't need those things, then the IRA will be the same for you, and it costs less. If you are wondering, the super majority of plans we do are 401(k) plans. Changes in the law have really made it more useful for most people. The IRA is usually on better footing if you are, or are very near, retirement age. That reduces the likelihood of contributions, and removes the penalty differential on withdrawn funds.
We hope you've found this useful. We pride ourselves in providing the best support while being informative, helpful, and fair. We hope to have the chance to prove that to you. Thank you, and enjoy the site.
Please contact us for more information about starting the right account for you.
While we're on the subject of money
You may also have noticed from the upper right corner of our website that we have a thing against different kinds of illness. Too many people leave too soon, and we're tired of it. We hope you are too. It isn't right for people to save their whole lives and then have to spend what they've put aside to try and fight for their health.
