IRA vs 401k (7 Differences!}

IRA vs 401k (7 Differences!}


– Hey guys, this is Toby Mathis, and today we’re gonna go
over a very simple question which is the difference
between an IRA and a 401k, what you can do in one and
what you can’t do in one, things like that, we’re just
gonna do a quick comparison. (soft rock music) Subscribe to the YouTube channel, click the bell notification icon so you know when a new video’s uploaded. Tax laws are changing all the time, the laws are changing all the time, that’s why you’re first to
know, you’re first to grow. So number one, let’s be very, very clear when we talk about an IRA we’re talking to an
Individual Retirement Account. Individual actually means
something, so the I means me, I’m an individual, versus a 401k which is
sponsored by a company. And so they do fall under
different sections of the code and they do have different rules. And the most important thing is to figure out what
those differences are. So let’s just kind of go through, I’m gonna really hit on seven on them. But the first one is
this thing called UDFI. Oops, where’d I put my little thingy here? So we’re gonna say UDFI which is unrelated debt-financed income, and then we also have Unrelated
Business Income Tax, UBIT. Why are those things so important? It becomes really important because you do not have UDFI in a 401k, you only have it in an IRA, and this is really important. And what it really means
is that if I get financing on an asset that’s inside of an IRA, so let’s say I buy real
estate inside of an IRA, and I get financing on it, I’m gonna have to pay tax
on the portion of the income that is derived from the debt. So if I buy a $200,000 house
and half of the house is debt, I’m paying tax on half of the
income that’s being generated. That does not happen in a 401k. So a 401k on that one gets a little check. You know, so you look at it say jeez, that’s pretty big difference. And this gets even more important when you’re actually investing in syndication and things like that. If they have underlying debt, then it should pass through
to the holding entity. So if you have an IRA and
it’s investing in something like a private investment of some sort, and that it’s financed with debt, you could be looking at
a pretty sizable tax hit that you just don’t even
know exists out there. The other one is unrelated
business income tax which is if I run a business that is not related to the exempt purpose, and underneath an
exception, it is taxable. So the easiest way to look at this is if you have a
brick-and-mortar business, and it’s making money, and you do that inside
of a retirement plan, you’re gonna have to pay tax on that. Now if you are a passive
investor in a business, then that’s an exception, and so we look at things
like rents an interest and things like that. Like I could loan money
in an IRA or a 401k, I don’t have to worry about the tax, but if I set up a new business
and do it inside of an IRA, I’m gonna be paying tax on it. If I do inside of a 401k, then I’m gonna be paying tax on it, unless you fall under something
called a ROBS transaction which is Rollover as a Business Startup, in which case you’re partnering, not as a disqualified
person, you understand? You’re actually partnering ahead of time, you’re not doing
transactions continuously, you’re funding at once
and it’s a shareholder. There’s a way to do it,
I’m not gonna confuse you. But just know that those
two issues are out there. The biggest difference is UDFI
does not happen to a 401k. Number two is loans. I can loan, oops. I can loan money from either entity, or from either an IRA or a 401K. I can loan money to unrelated parties, but I’m allowed to loan
money to myself in a 401k. I cannot loan myself money in an IRA. So I’m gonna say hey, check. I can loan myself up to
$50,000 per participant. So it’s $50,000 paid back over five years. So if I want to, for example,
borrow money from a 401k and fund an IRA, I can actually do that. If I need a quick loan and I need it for six months to a year, I can borrow it right out
of my 401k, up to $50,000, married couple, you’re
looking at 100 grand. It’s capped at 50% of your plan assets. So if you have say, what’s a good number? 30,000 in my plan, I can borrow
up to half of that, $15,000, capped at 50,000, so it’s
50%, so it’s $15,000. So I could borrow $15,000 tomorrow, pay it back over five years, and I’m paying interest to myself. Another big one is we have
some income limitations on what we can use to
put money into an IRA. So for example, I may have a set limit, like I might have $6,000 a year that I can to put into an IRA, but if I make too much, I can’t. If I’m trying to do a Roth
IRA then I have phase-outs and things like that. So that’s not the case with a 401k, 401k you can make as much
money as humanly possible, and you can put in a lot more. So for example, I think
it’s $19,000 to $56,000, I can defer the first
$19,000 of my income, then I can put in, or the company can match
up to 25% of my salary, up to 56,000 per 401k, by the way. So, if you have an employer 401K, you can still have another company that’s with a spouse, or with yourself, and you can be contributing more money into that one as well. So the contribution amounts
are significantly higher, and there’s no wage limitation, like I can put money into a Roth 401k and I don’t have to worry about
how much money I’m making, I can just do it, I can defer, or I’m not even deferring income, I’m just putting income in
there after tax dollars. Another big issue is, so we’re gonna call that one Amount, and I’m gonna give a little check over. The the next one is
prohibited transactions and what happens, your penalties. So, go through a couple situation. So let’s say that I have an IRA, and I have two pieces of property in it, I’m not supposed to use my personal labor to improve the value of the property. So let’s say I go down there and paint it, and that’s a clear prohibited transaction, and I just disqualified my IRA. Let’s say I had two
houses, each worth 100,000. My disqualification is the entire IRA. So I would have a $200,000
tax hit penalty and tax. Now let’s go through the same situation, but I’m in a solo 401k or a 401k. I have two pieces of property in there, this time, I paint a property, it disqualifies that asset,
I have $100,000 distribution, not 200,000, this literally
cuts the penalty in half. And so are those our little differences. If you’re doing anything that is even borderline on the edge, then your 401k becomes a
much more forgiving plan. A lot of folks, if they’re
doing things like properties, somebody’s gonna tell you
A, have them in an LLC inside the retirement plan, and you may want to have two
IRAs, one for each property. All right, next thing, let’s
just talk about control. So my control becomes much
easier when I have a 401k ’cause I can be my own trustee, in an IRA, I’m always
gonna have a custodian, even when you’re doing
a self-directed IRA. So typically, what happens
is let’s say TD Ameritrade, open up an IRA, their plan
documents are gonna dictate what you can put money into. It’s gonna end up being
things that TD Ameritrade allows you to do, like brokerage accounts, and things like that,
they’re able to make money. Now let’s say I go to a
self-directed IRA custodian, so I go to one of the biggies, and they’re gonna just say, hey, we don’t care wat you do in it, it’s no skin off our nose,
you can do whatever you want. There’s no prohibition on, for
example, buying real estate inside of an IRA, but TD Ameritrade won’t
let you buy real estate, ’cause they’re not getting paid on it, so they’re gonna say forget it. So you need to pay them directly, so you’re gonna be paying custodian fees. Now, you still have to have
the custodian put in the offers and close all the documents, plus you can’t put all the
money into a single account. So let’s say that I’m
buying a piece of property and it’s husband and wife,
and they each have $100,000 and they’re buying $100,0000 piece, or $200,000 piece of property, it takes one 401k to do that,
it takes two IRAs to do that. If you have an IRA, you have
to operate through a custodian. If you do a 401k, you
could be your own trustee, you could actually be writing the, you could actually be writing the check, and this is really important, for example, if you’re putting
in offers over the weekends, things like that, you need to
be able to put in an offer, you can’t do it as an IRA,
have have to do it as a 401k. You need to actually
have checkbook control. There are ways to work around
IRAs to get checkbook control, for example, you could have it own an LLC, and then you’d manage the LLC. You just have to be very careful, make sure you’re drafting those agreements very specifically for that purpose ’cause there’s disqualifications
that’ll cause you to get penalties and bad tax hits if you don’t know what you’re doing when you’re drafting up
that operating agreement, you gotta use a professional for it. All right, next one, number six, we’ll just call it investments. And we’re gonna give
ourselves, by the way, another check on that one. Investments, so when you have an IRA, again, you have certain
companies that are gonna say here’s those things
that you can invest in. So for example, if I
go to a TD Ameritrade, I can do mutual funds, I can do ETFs, I could do stocks and
bonds and things like that, but can I do Bitcoin,
can I do real estate, can I do precious metals? The answer is gonna be,
depending on their agreements, is gonna be no. So you’re gonna want to have your own 401K where you’re your own trustee, so you could be able to do that, or you’re gonna want to
do a self-directed IRA. Now here’s the big difference when it comes to things
like precious metals, I cannot take physical possession of precious metals in an IRA. If anybody ever tells you that you can, they’re not being straightforward
with you, it’s not true. You have to use a bank
or a bank equivalent. If I do a 401k, I could see
actual possession of it, so it’s actually much nicer, but there are restrictions on
what you can and cannot take, take possession of, so for example, I’m
probably gonna be doing government-issued coins, if I am doing something along those lines of doing precious metals. All right, last one, and we’ll
just call it my dog has fees. By the way, that gave us another check, and the seventh one is
gonna be a big check too, to the 401K. I mean these things aren’t really close when you get down to it. Here, let me make sure
that you guys can see that. Hmmm. When we are looking at
putting fees onto it, you want to make sure that
you can avoid some of the, some of the costs. When you’re looking at a
brokerage houses and things like, that control assets, or
if you have a custodian, you’re generally looking at about, I think the average is little over 2% on an industry average. If you do your own 401K
you’re your own trustee, there’s no cost. And so if you are going to do
self-directed transactions, if you’re doing ones or
twos and it’s low value, yeah, you could probably
get by with the IRAs, if you’re doing something heavy, and you doing what many
hundreds to thousands, then I would probably say you may want to be looking at a 401k and becoming your own trustee, so you’re not having to pay somebody to do all these transactions, ’cause they will nickel and dime you, and it’s no skin off, I don’t hold it against them ’cause they have to get
paid for their time, and it might be better to
put that burden onto you and let you be responsible so you can be your own trustee
on many of these plans. Anyway, that’s the difference
between an IRA and a 401k. For you guys, and especially those of you that are involved in real estate, I’m probably gonna be
pushing you towards the 401k. Again, I’m not saying IRAs are bad, in fact, I’m not saying
you have to use either/or, I’m saying it’s that certain transactions are gonna lend themselves
more towards the 401k. You might still have an
IRA out there, for example, we can actually get over
$50,000 a year into a Roth IRA through the use of a self-directed 401k. I’m not gonna spoil it for you today, I’m just gonna say that there’s
some things that you can do, you need both at the end of the day, but it’s kind of like any tool box, you can pick up a hammer and it’s really good for driving nails, but if you try to screw
something in with it, it’s not gonna work. You gotta have the right tool for the job, and again, it comes down to
working with a good advisor who understands the differences, so give us a call if
you have any questions or if you want to make sure that you’re using the right tool for whatever you’re trying to accomplish. (soft music)

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