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SHOW NOTES FOR EPISODE 131: INVESTING POWER OF THE SELF-DIRECTED SOLO 401-K
The tax benefits of the self-directed solo 401-K are ideal for real estate investors. In this episode, our guest, Dmitriy Fomichenko, discusses the multiple benefits of the self-directed solo 401-K and how you can qualify to open this valuable investing vehicle for your real estate investing activities.
What You Will Learn
- The major differences between a self-directed IRA and a self-directed solo 401-K
- Why a self-directed solo 401-k is better for real estate investors than a self-directed IRA
- How anyone can open a self-directed solo 401-K
- About instant checkbook access to self-directed solo 401-K
- How a W2 employee can qualify to open a self-directed solo 401-K
- How loan access to your funds can save you thousands of dollars
About Our Guest
Dmitriy Fomichenko
Dmitriy is the founder and president of Sense Financial Services LLC, a boutique financial firm specializing in self-directed retirement accounts with checkbook control. He began his career in financial planning and real estate investing in 2000. He owns multiple investment properties in various states and is a licensed California Real Estate Broker.
Dmitriy founded Sense Financial Services to help his clients maximize their returns on investments while protecting their hard-earned money. He is very passionate about helping families and individuals achieve financial freedom by following proven Biblical principles of financial planning and investing.
Dmitriy resides in Southern California with his wife and 10-year old daughter. He is an active member of Kindred Community Church in Anaheim Hills, CA where he serves in men’s ministry. In his spare time, he enjoys studying systematic theology, spending time with his family and visiting new places.
More About Dmitriy
- In 1996, moved to America from Russia
- Had an electro-mechanical engineering degree from Russia
- When he came, he spoke no English and had no money
- Went to school to learn English as a second language
- Got engineering job
- Downturn in economy caused him to start investing in real estate
- Also started learning financial services
- Worked for local real estate investment company 2009-2019
- Since conventional financing was not as available, people were using IRA funds and other ways to invest in real estate
- Because of his financial services experience, he became the point man for these clients and eventually established a department within the company
- Broke off and formed Sense Financial where he helps people maintain checkbook control of their retirement accounts
Sense Financial
- Has applied “engineering background” to establishing systems within his company for smooth flowing operation
- His company specializes in self-directed Solo 401-K
Self-Directed Solo 401-K
- Most people familiar with self-directed IRA – special custodian that allows you to invest in alternative assets
- Self-Directed Solo 401-K differs in that it is for people who are self-employed or own a small business where you have no other employees besides a spouse – not for people who have W2 job or are retired and aren’t working
How Can You Open a Self-Directed Solo 401-K if you are W-2 Employee or Retired?
- Set-up your own business to qualify
- By having a business, you can create multiple streams of income
- Can take advantage of many business tax write-offs
- Business requirements
- Don’t need separate tax I.D. or business license
- Just need “presence of self-employment activity”
- Sole proprietor
- 1099 income
- Consultants
- Real estate agent
- Property manager of own properties
- Don’t need income right away but have “intention of generating income and profits” later on
- Most not have full-time employees
- Evidence of passive income from rental properties
- File IRS Schedule C shows proof of income
- Had one client that worked full-time at CVS pharmacy but got a real estate license, which qualified him for the Solo 401-K. Took a year before his first real business income
Differences Between Self-Directed IRA and Solo 401-K
- Main difference
- IRA requires that you have a custodian (“middle man”) who limits your investment options. Has to go through custodian to do transactions
- Solo 401-K does not require a custodian
- Complete required IRS forms
- Set-up a Solo 401-K plan
- Establish a tax-exempt “trust” as a vehicle to hold plan assets – unique name and tax I.D. number registered with the IRS
- Client is designated as “trustee” to administer plan assets
- Set-up a business checking account in the name of the trust
- You can transfer funds or write a check immediately when you need the funds
- Annual Contributions
- IRA max – $5,500 or $6,500 (only if you’re over 50)
- Solo 401-K – $54,000 or $60,000 if you are over 50 (Husband and wife can shelter $120,000)
- Roth Account
- IRA – must separate traditional IRA from Roth IRA accounts (2 separate sets of fees)
- Can only contribute up to $6,500
- Your income determines how much you can contribute
- Solo 401-K – Has built-in Roth account
- Can contribute funds post-tax
- Or can tax pre-tax money and convert into Roth
- Can contribute up to $24,000
- Income doesn’t matter on contribution amount
- Roth funds are post-tax so you are not taxed on distribution
- IRA – must separate traditional IRA from Roth IRA accounts (2 separate sets of fees)
- Loan Feature
- IRA or Solo 401-K
- Can borrow $50,000 or 50% of your balance, whichever is less, and don’t have to pay penalties or tax on distribution
- Interest rate – prime plus 1
- IRA or Solo 401-K
- Roll-Over
- Can roll-over any qualified retirement account into a Solo 401-K
- Exception: cannot roll-over existing Roth IRA
- Prohibited Transactions
- With IRA, if you have a “prohibited” transaction, you could be penalized up to 100% of your account balance
- With Solo 401-K, if you have a “prohibited” transaction, you could have the ability to correct it by undoing the transaction
- If you don’t fix it, only the amount involved in the “prohibited” transaction will be penalized – not the entire 401-K balance
- Fee Cost Efficiencies
- IRA – larger the account, the more expensive to maintain and transact business (higher fees)
- Solo 401-K- nominal fee to maintain account and NO transaction fees because you maintain through your checkbook. Balance size does not matter. All pay same annual fee.
Key Advantages of Solo 401-K for Real Estate Investors
- Can get immediate access to funds when you need them
- Leverage – If you use IRA money to purchase property and take out a loan, income that comes from the financed portion of property is subject to “unrelated business income tax” up to 39.6%. Solo 401-K is exempt from this tax.
- Passive investors participating in syndications can use Solo 401-K money
Dmitriy’s Plans for His Business
- Has team of 6 people
- Will continue
- Has Solo 401-K
- Invests in real estate and trust deeds
- Will continue to grow
Rap-It-Up
- Favorite real estate books: Buy and Hold by David Schumaker and Real Estate Debt Can Make You Rich by Steve Dexter
- Favorite business books: Book of Proverbs in the Bible and Cash Flow Quadrant by Robert Kiyosaki
- Favorite quote: “Good planning and hard work leads to prosperity”- Proverbs 21:5
- If you had to start all over, knowing what you know, and you only had $1,000, what would you do to re-launch your business? Would use the funds to start out-sourcing and delegating earlier.
How You Can Reach Dmitriy
- Website: SenseFinancial.com
- Phone: 949-228-9393
- EMail: dmitriy@sensefinancial.com
Special Offer
- Free consultation for Old Dawg’s listeners
- If you sign-up for Self-Directed 401-K services with Dmitriy, MAKE SURE you mention that you heard about it on the OLD DAWG’S REI NETWORK PODCAST and you’ll get an EXTRA 10% DISCOUNT!
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