Funding Solo vs. Combined Retirement Accounts (Solo 401k’s, IRA’s, Multi-Member LLC’s & more)

Hi, David Moore. IRA Advantage, iraadvantage.com. And today we’re going to talk a little bit about funding of Solo 401ks and IRAs. We’re also going to talk about funding multi-member limited liability companies, checkbook IRAs, where you’ve got the LLC has multiple members and those members are disqualified parties to one another. So let’s just simply define a basic self-directed IRA first off, then we’ll talk about a checkbook IRA, then we’ll talk about Solo 401k. And CC, who’s filming this going, “Oh, good luck with this. This is going to be eight minutes.” No, it’s not. Anyway, well, I’ll just talk very quickly, and that’s unusual.

So when we’re talking about, actually, a basic self-direct IRA first, any time we’re looking at self-direct IRA, we’re just, in the most basic sense, moving money from a trust company that doesn’t allow you to do what you want to one that does. Period. That’s it. That’s all that’s really happening. It’s not any more complicated than that. You’ve got money with a trust company that doesn’t allow you to go out and buy what you want to buy. Maybe you want to buy gold today. We’re talking in September of ’22, so there’s lots of instability out there, and there’s lots of thought about tangible assets. We’re all seeing lots of advertisements and hearing those advertisements for precious metals.

And I’m not going to make a judgment whether you should or shouldn’t do this stuff, I’m just going to tell you diversification is your best friend. And typically in recessionary times, tangible assets are great inflationary hedges. So if we look at a basic self-direct IRA, it’s not all or nothing either. You’re just going to move what you want to use in that self-directed capacity. I think it’s very important if we’re looking at IRAs that you understand just move what you want to use because when we’re looking at a prohibited transaction, if you’ve got a Wall Street account, you’ve just got Wall Street offerings. You can make a poor investment choice, but it’s virtually impossible for you to make a prohibited transaction.

In my world, there’s no guardrails, so if you want to commit a prohibited transaction, you’re going to do so. And the problem with a prohibited transaction with an IRA is all funds in the account are treated as distributed as of the first day in the year in which the indiscretion occurred, so you don’t want to do this. What might be considered a prohibited transaction? Let’s say you go buy a place, a vacation rental down at the beach, and you think, “Well, gee, I’m going to go out and work on it.” That’s a prohibited transaction. Let’s say you just want to go out and stay in it. No, nobody’s going to know. That’s a prohibited transaction. You want to let mom use it, that’s a prohibited transaction.

So it’s really important when you’re looking at retirement accounts, you’re very, very careful. I tell people, look at their retirement account, anything that that retirement account owns, don’t think of it as you. If you think of it as you, you’re going to have a tendency to either guarantee a loan or pay a utility bill or take some of the revenue from it. That thing, your retirement account is not you. Now, ultimately, it will be yours someday, but it’s not you. So that retirement account, whatever it owns, if it owns that retirement property on the beach, it’s not on your homeowner’s policy. It’s a new policy in that plan’s name and tax ID number for that thing. And the income is not yours, the expense is not yours, you’re not going to be writing off trips to check this stuff out because it’s not yours.

So basic account, move what you want to use from Trust Company A to Trust Company B. Checkbook IRA just means we’re going to create a limited liability company, an IRA specific limited liability company that the trust company makes the investment in. So a basic account, the property is literally owned by the trust company for benefit of your IRA. A checkbook IRA, or IRA LLC, the trust company’s involved with one investment, the membership interest in the LLC, which then makes all investments. You typically are going to be the manager of that limited liability company, so it’s very, very nice, easy to use when you’re making a contribution.

So to make a contribution to a basic account, you’re just going to move the money to the trust company, and that’s it, it’s there. If you want to add money to that checkbook IRA LLC, a common mistake might be to just write a check to the LLC, or to take a distribution straight from the LLC to you. Either one of those things constitutes a prohibited transaction. So the gateway to your IRA LLC is always going to be through the trust company. So whether you’re making a contribution to a basic account or making a contribution to a checkbook IRA, either way, it’s going to go through that trust company. The only difference is if it’s a basic account, the money is there to use from that level. If it’s a checkbook IRA, the money’s going to go into the trust company, then additional investment’s going to be made in that limited liability company, which then gets the funds into that account.

A Solo 401k is something where you’re going to have a bank account, the plan’s name and tax ID number, typically, you’re the trustee of the plan. Contribution is going to be made simply by writing a check into that plan’s account or a distribution would be taken by writing a check from that account out to you. Now, one thing I really want to clarify, when we’re looking at any IRA or 401k-owned asset or investment, for example, we want to look at two issues. What do you want to buy and who are you transacting between or for the benefit of? Now, I said between or for the benefit of, I didn’t say along with. Okay? So one, what are you buying and unless it’s specifically prohibited, it’s therefore allowed. Two, what causes you the most problems? Because an IRA just prohibits collectibles, life insurance contracts, or stock and Sub S corporation, a 401k can buy literally anything other than collectibles.

So rarely ever is the investment a problem. What triggers issues is transactions between or for the benefit of a disqualified party. And as I just said, between or for the benefit of, but it doesn’t say anything about doing a transaction along with. So if you want to be a co-owner of a property personally along with plan money, that’s possible. If you want to combine Roth money and traditional money into a common LLC, that is possible. But anytime we’re combining things into a common entity or investment, we’ve gotta be very careful. So if we do a checkbook IRA LLC, for example, a single member IRA LLC money can go in and out of, no problem. We now add, let’s say you’ve got traditional funds and Roth funds in that IRA LLC, now you’ve got two disqualified members in that entity. The initial investment into it funding it is fine, but you cannot add money from any disqualified source in the future without creating a prohibited transaction. So it’s really important if we’re doing a multi-member LLC with disqualified parties as members, that we over-fund that investment because we cannot get more money into the LLC after that initial investment.

401k jointly owned, personally, fine, you can do it. Tendency in common, or you could do it as common members of an LLC, either of those things are going to be fine. But for the most part, this video, we just want to talk about contributions, distributions, and if it’s a basic account, the money’s going to flow just from the trust company to you or from you to that trust company. The checkbook IRA distributions, contributions are always going to flow from the LLC, checkbook IRA LLC back through the trust company to you or from you through the trust company into the LLC. And with the 401k plans, once again, you’re just making a contribution directly to that plan’s account or taking a distribution straight from that plan out.

So hopefully this has helped a little bit. Actually, one last comment on prohibited transactions when they’re… In regards to disqualified parties. Disqualified parties to your plan would be you, your spouse, your lineal ascendants, descendants, their spouses, or any legal entity owner controlling interest by one of those. So you couldn’t sell to, buy from, loan to, borrow from. You couldn’t have a disqualified party be a guarantor on a loan, that type of thing. But what I didn’t mention is aunts, uncles, cousins, or siblings. So any of those parties, aunts, uncles, cousins and siblings, none of them are disqualified parties.

So just keep that in mind in the future if you’ve got something. Maybe, for example, we had somebody this morning wanting to have an account, put together to go out and buy some property and they’re wanting to make an offer today. And it’s going to take maybe with a checkbook IRA today, it might take a month to get the deal done, and they can’t just personally tie the property up and assign it over the plan later, that would constitute a prohibited transaction. I said, “Look, just let your brother go out and make the offer and then when you’ve got the account set up, you’ll end up assigning that purchase sale agreement from your brother to you and or not from your brother to you, but from your brother to your retirement account and then you’re free to go and you don’t have any issues there.”

So the only dumb questions are the ones you don’t ask. Hopefully this has helped a little bit today. Please don’t hesitate to reach out with any questions anytime. And once again, David Moore, Equity Advantage for 1031s, IRA Advantage for self-directed retirement accounts, iraadvantage.com. Thank you very much for your time. Bye-bye.