Dmitriy Fomichenko elaborates on who can use a self directed IRA and how to utilize them to your benefit.
Pulling money from your IRA can be costly, but within a self directed IRA, there are a few ways to borrow from yourself without penalty.
Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Dmitriy: Welcome to the REI Classroom. My name is Dmitriy Fomichenko and I’m the Founder and President of Sense Financial. Today, I will be your host. The topic of my presentation today is how to access money in your IRA or 401(k) tax-free and penalty-free before retirement.
Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com
Dmitriy: You can do that by utilizing a self-directed retirement account Solo 401(k). It’s also known as the ultimate retirement account. The reason it has this name attached to it is because of its great advantages or great benefits that it offers to those people who participate in these kinds of plans. Now, just a very quick background. The Solo 401(k) plan is designed for those people who are self-employed or own a small business. If you are self-employed and own a small business, that’s the first criteria. Criteria number two is you cannot have any full-time employees working for you. There are a lot of people who work for themselves, they don’t have a staff. If you are in that situation then you qualify for a Solo 401(k). You can take advantage of this plan.
Once you create a Solo 401(k), you can roll over any retirement account into a Solo 401(k) with one exception. There is one exception and that is a Roth IRA. The IRS does not allow you to roll over a Roth IRA into a 401(k). Any other qualified retirement plan, including a 401(k) from your past employer, 403B, 457, IRAs, traditional IRAs, SEP IRAs, can be rolled over to a Solo 401(k).
Now, let’s say you have a Solo 401(k), unlike an IRA. If you an IRA and you have an urgent need for some cash. You have money in your IRA. The question is can you access those funds? It is your account so you could access those funds. However, not without the consequences. If you are going to access money in your IRA, you’re going to pay taxes, number one, and, number two, you are going to pay penalties on top of that because you have taken an early distribution. Let’s say you’re in your forties of fifties and you need those funds so you can access that’s but there are going to be consequences. And, often times, the tax consequences plus penalties can be as much as 50%.
A quick example for you, a lady that wanted to pull some money, she is one of my clients. She met with her CPA. She had a 401(k) with her past employer. She needed the funds, she met with her accountant and he told her, “You need to pull out $20,000. So, after paying taxes, you’re going to end up with about $10,000 after paying taxes,” which is the amount that she needed. So nearly a 50% tax impact. But what you can do with the Solo 401(k), a Solo 401(k) has this feature called a participant loan. So you, as a participant of 401(k), can apply and approve yourself for a loan. And the loan with the Solo 401(k), the rules for the loan are you can pull up to $50,000 or 50% of your balance, whichever is less, and you can do it anytime, tax-free and penalty-free. And you can use those funds for any reason.
If it’s a loan, yes you have to pay it back. And the payback period is five years and you have to make amortized payments. If you are using the loan to purchase your primary residence, the loan can be extended to 15 years. This is a great feature that is available to plan participants or Solo 401(k) plan owners.
It’s not something that I normally encourage to use because by pulling the money out from your 401(k), you are depleting the balance in your 401(k) that would be available for investments otherwise. But if you ever need the cash, this is it. It’s like you created now your own bank that you can go and pull the money out anytime and you are the one who is approving that. This is great to way to use for some unexpected expenses, whether it’s an emergency or whatever.
Maybe you’re doing a deal that would otherwise be a prohibited transaction inside of your 401(k). You cannot do that maybe because of the disqualified person that is [Inaudible 00:05:08]. By pulling the loan out from your 401(k), you can use the funds for whatever it is that you need. And all you have you do is pay your regular scheduled payments back to the 401(k) plus the interest. The interest is set at prime plus 1%. Currently, that is 4.25%.
Whatever you do with the money, whether you are making an investment personally, you keep all of the return, you just pay the interest back. Again, it’s a great way to create your own bank that will never turn you down. That is my tip for you for today. Thank you for joining us and I will see you next time.
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