Hello Passive Investor world. As passive investors, a big part of our focus is obtaining investment capital to meet our investment objectives. Passive investors invest in alternative investments in a few different ways. Either by divesting into other investments by way of cash, 1031 exchanges, whole life insurance policies, moving capital out of stock investments or simple through their 401k. For the sake of this article, we’ll focus on the 401k avenue with Self-Directed IRA (SD-IRA) and the Qualified Retirement Plan (eQRP).
Most investors, the bulk of their potential investment capital is tied up in retirement plans. Many do not realize that there are options to unlock that capital from your IRA or 401k. If you are a working professional and have a 401k, you may want to pay attention to this strategy as you might find it helpful. There are options for tapping into cash from your retirement funds to invest as you please. In this article, we will discuss and compare two options, the Self-Directed IRA (SD-IRA) and the Qualified Retirement Plan (eQRP).
Self-Directed IRA
For those of you who tuned into episode JF104 podcast with guest Jason Debono of The Passive Investor Show, he discussed the Self-Directed IRA (SD-IRA) and its benefits to investors. This is how it works: most IRA’s are brokerages and banks that invest in stocks and funds; with the SD-IRA, you work with a trust company (AKA a custodian) who, unlike your 401k provider, has no investments to offer. Instead, they simply allow clients to invest in alternative investment classes. Whereas regular 401k’s limit the types of investments that one can make to stocks and funds and other “traditional investments,” SD-IRA’s allow for alternative investments such as real estate, private equity, real estate investment funds, syndications, notes and even specialized niches such as cryptocurrency and so on.
From Jason’s experience, his clients at NuView IRA most commonly use their newfound freedom to invest in the following types of assets.
- Real estate: this includes active models such as flipping houses or passive strategies such as lending or investing in syndications, with which you are likely familiar.
- Private Notes: According to Jason, this is the second largest category of SD-IRA investing. While notes can be a subset of real estate, it can also include personal loans or small loans for other business ventures or projects.
- Everything else: This can include other types of assets, many of which most investors will find unusual. This includes precious metals, cryptocurrency, and even those odd investments Jason mentioned such as investing in racehorses or burial plots.
As you can see, the SD-IRA allow for much more flexibility for hard working professionals to better invest their funds in assets of their choosing.
A few important notes on the SD-IRA. Jason cautions listeners to ensure that they have a solid understanding of the investment class, individual investment and their personal investor skillsets. Because you are no longer investing with a custodian, you now have taken the future of your wealth into your own hands and investing through a custodian. It is a double-edged sword. Typically, the contribution limits are set at the familiar $6,000 per year or $7,000 if you are over 50. Finally, there are relatively higher transaction fees associated with these plans. This is certainly a small price to pay for the freedom and flexibility of investing as you please. Jason also goes on to explain the difference between profits vs contributions on the podcast so tune into episode JF104 to learn the difference of the two.
For more clarity, this is not to be confused with Solo 401k’s or the SOLOK as it’s commonly known as. The SOLOK has provides a better comparison to the eQRP that we’ll dive into as you keep reading.
Qualified Retirement Plan (eQRP)
Now, the Qualified Retirement Plan, the lesser known alternative, builds on the SD-IRA, affording working professionals the same greater freedoms for investing with their retirement as they please. For the eQRP, make a note to listen to JF133 episode with Damion Lupo of EQRP.
In the episode, Damion shares the benefits of the eQRP versus the standard SD-IRA. One of the more easily understood advantages of the eQRP versus the SD-IRA is the contribution limits. Whereas, the SD-IRA contribution limits are set at the familiar $6,000 annually, the eQRP allows for contributions of nearly $50,000 annually, nearly ten times that amount! Next up, SD-IRA’s tend to have higher transaction fees than normal IRA’s. With eQRP, there are zero transaction fees.
Another notable characteristic of the eQRP are the tax advantages. Within a normal IRA, the IRS will tax you if you use your IRA for real estate and there is debt involved. This is called Unrelated Business Income Tax (or UBIT). The eQRP is exempt from UBIT because it conforms with a different set of rules (IRS rules under Section 401) than the standard IRA.
Finally, the eQRP allows for even more flexibility than an SD-IRA. With an eQRP, you can take physical possession of precious metals, which is not allowable with an SD-IRA. All eQRP’s come with a built-in line of credit and total checkbook control, allowing for easy access and use of these funds.
Whichever option you decide, you are taking an additional step towards your financial freedom! No longer subscribing to the traditional IRA where your investment options are limited to volatile stocks and funds that you hard to understand, you will now have access to hundreds of other investment vehicles and millions of investment opportunities!
For mor information:
NuView IRA and what they have to offer go to: https://www.nuviewtrust.com/
eQRP and what they have to offer go to: https://www.eqrp.co/
If you have considered investing with a private equity investment firm, please create your investor profile with The Fortes Company at www.investwithfortes.com.
Contributor Guest writer Rodney Robinson of http://rodneyrobinsonii.com/.
Disclaimer: The views and opinions expressed in this blog are provided for informational purposes only, and should not be interpreted as an offer to buy or sell any investment or course of action.