HOW TO Qualify for a Self-Directed 401k... Even If You Don't | Episode 141 - a podcast by Bryan Ellis - SelfDirected.org

The king is dead, long live the king!  The Self-Directed IRA used to be the king of the hill for self-directed investors planning for retirement, but now, it’s the Self-Directed 401k… and it’s so much better than the IRA version, it’s not even close.  But do YOU qualify to have one?  And if not, HOW CAN you qualify?  I’m Bryan Ellis.  I’ll tell you right now in Episode 141.

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Hello, SDI Nation!  Welcome to the podcast of record for savvy self-directed investors like you!

For the longest time, the Self-Directed IRA was the king of the hill for those of you who want to invest your retirement funds in anything other than stocks, bonds, mutual funds or any other exchange-traded asset.  The Self-Directed IRA was like manna from heaven because suddenly, here was a tool that imposed very few limits on our investment choices, and we could finally buy real estate or private companies or precious metals or private placements or whatever we wanted with very few real limitations.

What’s more, there was a broad perception for a very long time that the IRA was basically a fortress.  Once money goes in, no creditor or government agency could ever take it out.  But it turns out, that’s just not true… there’s the specter of this thing called prohibited transactions which, when you commit one, your IRA ceases to be an IRA, subjects you to huge taxes, penalties and interest, and just as importantly, exposes everything in your IRA to creditors.

To make it worse, once your IRA is polluted by a prohibited transaction, there’s very little you can do to correct it.  In short, you’re screwed.

And so when this thing called the Self-Directed 401k came along, we were all excited about it because it was an improvement over the self-directed IRA in some useful ways, like… it could accept a whole lot more money, and you could borrow money from it, and you could absolutely and pretty easily directly manage your own capital without the involvement of an expensive custodian.  There are even some circumstances where the IRA would be subject to regular income tax and the 401k wouldn’t.  All good things… but maybe not game changers.

But there is ONE game changing difference that, even if everything else was the same, would make the Self-Directed 401k infinitely superior to the IRA, and it’s this:  The prohibited transaction rules are different, and far more favorable for 401k’s, than for IRA’s.  To be clear, you’re still subject to prohibited transaction limitations when using a 401k.  No doubt about it.  But unlike with IRA’s, there’s a very clear approach to CORRECTING problems you may have caused yourself by committing a prohibited transaction.  Yes, it will cost you a bit of time and money to make those corrections… but, unlike with IRA’s, correcting a prohibited transaction in a 401k is entirely possible.  And whereas the penalty for committing a PT in an IRA is absolutely draconian and disastrous, the cost for correcting PT’s in a 401k can be managed without costing you your entire retirement savings.

But here’s the thing… it’s those pesky regulatory issues Chad referred to a moment ago… there are some very specific requirements for qualifying for a Self-Directed 401k that are a bit more stringent even than for IRA’s, which are really restricted only as a function of your age and income.

What are those requirements to use a self-directed 401k?  Really, it all boils down to one thing:  You’ve got to be an owner or partner in a business that has no full-time employees other than yourself, your partners and spouses.

That’s it.  Well, technically you also have to have taxable income in the year you start the plan.  So there’s that.

So If you own or are partner in such a business, then you’re good.  And you should set up your self-directed 401k right away, with haste.  I’ll give you a suggestion in just a moment for where to go to set it up, because not all 401k providers are the same, and you may as well start out with the very best option.

But what if you don’t fit that requirement?  What if you don’t own a small business?  Or what if you DO own a small business, but you have full time employees?

Let’s deal with those separately.

If you don’t own a small business, but you’re serious about self-directed retirement investing through a self-directed 401k, then here’s what I suggest you consider:  Start a business.  It doesn’t have to be a huge business, and it doesn’t have to be a full-time business.  It just has to be a legitimate business.  Why don’t you go out on Craig’s List, buy a wave runner, and rent it out a few times a year?  That’s a small – but legitimate – business, and would reasonably be enough to let you create a self-directed 401k.

Of course, such a tiny business won’t put off enough cash to allow you to make huge contributions to the plan, but it will allow you to do something very important… it will allow you to create the plan so that you can TRANSFER your current IRA savings into your 401k!  And that, my friends, is a very wise thing to do.  Yes, there are some limitations to that, but particularly if you have retirement savings either in a traditional IRA or in an employer 401k, chances are very, very good that you could transfer all of that money into a self-directed 401k and start to enjoy all of the benefits that make the 401k wildly superior to the self-directed IRA.

And what if you DO own a small business, but you have employees?  You’ve got a couple of choices, one of which is to restructure your business into multiple entities such that one of those entities complies with the requirements of law, or you can set up a normal 401k for you and all of your employees, which just happens to be self-directed as well!  Yes, that’s possible.  Hang with me for a suggestion on who to handle this for you, because it’s got to be done right.

So my friends, two things I want you to know:  Having a self-directed 401k is worth its weight in gold, particularly for you real estate investors, or anyone buying non-exchange-traded assets.  That’s because the IRS is taking the position that EVERY self-directed IRA contains a prohibited transaction, and they believe it’s their job to find it.  They don’t even give the slightest presumption of compliance.  Thus, having a self-directed 401k in which it’s possible to correct those errors, do so affordably and with relatively little complication… that distinction alone is a massive, massive advantage.

And no matter which situation you’re in – you already qualify for a self-directed 401k but don’t have one, or maybe you don’t qualify but would like to, or maybe you’ve got too many employees – no matter which is true for you, here’s what I recommend:

Go over to SDIRadio.com/best401k to get my recommendation for who to guide you to set up your plan.  There’s one guy who is the best of the best at this, and his info is there at SDIRadio.com/best401k…

We’re out of time today folks, but remember:  I’ve got a very, very special webinar coming up TOMORROW that will tell you how you can get involved in some incredibly attractive cash-flowing properties that… well I’m just blown away.  It’s the result of a distress situation where I was in the right place at the right time, and let’s just say, if you’re looking for cashflow properties, you’ve GOT to hear this right away.  To join that webinar, just text the word TOPPICKS to 33444 or if you’re outside of the United States or otherwise can’t text, just visit SDIRadio.com/cashflow.  You’ll be very, very glad you did.

My friends… Invest wisely today, and live well forever!

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