October 10, 2021

JF2595: Top 7 Benefits of a Solo 401(k) with Dmitriy Fomichenko #SkillsetSunday

After buying his first property 20 years ago and working full time for a real estate investment firm, Dmitriy Fomichenko started Sense Financial to help people gain control of their retirement savings. Today, Dmitriy is telling us about the Solo 401(k) for small business owners, how his business dramatically shifted when he introduced them, and why he thinks they’re a no-brainer when compared to traditional retirement savings strategies. 


Dmitriy Fomichenko Real Estate Background:

  • Founder and president of Sense Financial, a boutique financial firm specializing in self-directed retirement accounts with checkbook control
  • Passive investor, owns interest in multiple MF & self-storage syndications, private lender, and licensed California real estate broker
  • Based in Orange County, CA
  • Say hi to him at: SenseFinancial.com

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Deal Maker Mentoring

Deal Maker Mentoring


Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever. We don’t get into any of the fluffy stuff. With us today, Dmitriy Fomichenko.

How are you doing, Dmitriy?

Dmitriy Fomichenko: Oh, Joe, I’m doing what are well, thank you for asking. It’s great to be on your show again.

Joe Fairless: Well, I’m glad that you’re back. If you recognize Dmitriy, well, you’re either on BiggerPockets a lot, or you’re a very loyal listener to this podcast, because last time I interviewed him was Episode 450, and that was many moons ago. I haven’t looked up what date that is, but that was a long time ago. And on that podcast, we talked about the checkbook IRA. But today, we’re going to be talking to Dmitriy about the self-directed solo 401(k). It’s been a game-changer from his experience for his clients, and it’s something that he felt compelled to share, and I’m grateful that he’ll be educating us about the pros and cons of the self-directed solo 401(k).

So first off, let me just say a couple things about you, Dmitriy, and then we can get into it. So Dmitriy is the founder and president of Sense Financial; it’s a boutique financial firm. He is a passive investor. He owns interest in multiple multifamily and self-storage syndications. He’s also a private lender. He is based in Orange County, California.

So with that being said, Dmitriy, first, do you want to give just a refresher on your background, and then let’s go right into self-directed solo 401(k)s?

Dmitriy Fomichenko: Oh, sure. Well, I’m going to try to compress, there is a lot there. But as you can hear from my accent, I’m not from here. I immigrated in this beautiful country – by the way, the best country on Earth. I know there is a lot of people complaining, but I’ve lived elsewhere, and there is no better place than United States; it’s still the best place, and let’s keep it that way.

But my background is in electromechanical engineering, and that’s what I got my degree in. I worked in the field, got laid off, I got introduced to the real estate investing concept, started doing that, almost 20 years ago, in 2001, I purchased my first property. And then, the circumstances kind of pushed me into working full-time for a real estate investment firm. And prior to that, I had experience in financial services. And then the combination of that, basically, kind of forced me or I was asked to start a department working for that company. And about a year later, in 2010, I started Sense Financial, and that’s what we do – we help people gain control over their retirement accounts; essentially, take their IRAs and 401(k)’s from a prison that they are, because if you have a normal IRA or 401(k), you’re essentially kind of like locked up, you have very limited investment options… So we want to give you the control and the choices and the options to invest in virtually anything you would like.

Joe Fairless: So now let’s talk about the self-directed solo 401(k) specifically. When did the business pick up on that, and why did it appear on your radar, versus—has it always been around?

Dmitriy Fomichenko: Sure. Well, again, we started doing self-directed checkBook IRAs. That’s how I started at Sense Financial. Again, it started naturally, there was a need—by the way, just a quick tip for your listeners is that, if you want to be successful, and if you’re looking to start the business, figure out a need and come up with the solution, and be the best you can at that, and then the rest will fall into place.

So for me, there was a need, I came up with the solution; it was that I just created that solution for our investors, for our clients in doing that. And then, because it was kind of in the same field, I learned about self-directed solo 401(k), we brought that on board, and our business shifted dramatically. Right now, we’re doing more than 90% of our clients, setting them up with the solo 401(k), because it’s just so much better. There is still a place for checkBook IRA, because not everyone is eligible for solo 401(k), but if you compare them side by side, it’s obvious; it’s a no-brainer.

Joe Fairless: Well, what’s the best way to start – for you to compare the two side by side, or to talk about why 90% of your clients are going this direction?

Dmitriy Fomichenko: Well, first of all, let me just explain what that is. So something like that, a solo 401(k) – just like the name implies, solo means kind of solo entrepreneur, or a business owner that doesn’t have full-time employees in the business. So it’s for small business owners, okay? And you must have that business in place, or legitimate self-employment activity. So it doesn’t have to be like a  “corporation”, but if you’re a real estate agent or a consultant or a nurse who works independently, or you have your own side business, doing gardening for your neighbors even, or anything… If you have a Schedule C and no full-time employees, you qualify. So those are really the two criterias – having legitimate self-employment activity or a business, with earned income. That’s another key, it has to be earned income. I know, many of your listeners are real estate investors, and that comes up often. They say, “Well, I do own a rental property or two. That’s my, quote unquote, “business.”

Well, from the IRS perspective, rental income is considered passive. So you have to have earned income. So if you’re flipping property, even if it’s just one or two a year, that’s a business; that’s legitimate self-employment activity. You report that on your Schedule C, you pay self-employment taxes, and you’re eligible.

Joe Fairless: Is there an amount you have to make or loss?

Dmitriy Fomichenko: Well, not really; there is really a no minimum, but it needs to be legitimate. So on IRS actually, there is a good description there of a hobby versus business. It cannot be a hobby, it needs to be a business. So you need to be in it for profit; maybe not necessarily to begin with your first year, but your intention needs to be to make a profit, and it needs to be more than $200 a year, right? So if you’re in business and you’re making $200 a year—to give you an example, I know some people who do photography, and it’s kind of like a hobby for them; they maybe do a photoshoot or two a year, and it’s only a couple $100 or a few hundred dollars a year. It’s really a hobby, that. And so it needs to be for-profit, or with the intention of making a profit. There is really no minimum, and you can do it part-time, you can have a side gig. Many of my clients, they’re employed full-time, they want to keep their jobs, but they do something on the side. Like I said, flipping a house or two on the side is a great, or doing anything else. Again, as long as you report that on the Schedule C and you show profit, that’s it.

Break: [07:30] to [09:32]

Joe Fairless: This is probably venturing into your area of non-expertise; this is more of a tax thing, but if you know the answer, please let me know. You don’t have to put in a certain amount of hours each year?

Dmitriy Fomichenko: No, no. There is no hours requirement. Again, you can work an hour and you can generate five grand doing something. So, again, you’re not an employee, you’re doing something, it’s a business and IRS doesn’t require you to track the hours if you’re self-employed. You don’t report hours anyway, you’ve just got to show income. And again, you can start the business and you can be eligible right away. Again, if it’s a legitimate business and if you have intention of generating profits, you can still do it.

Joe Fairless: Got it. Okay. So that’s who qualifies.

Dmitriy Fomichenko: Correct. Yes.

Joe Fairless: Okay. So now, what do you do? Will you just describe the solo 401(k)?

Dmitriy Fomichenko: Yeah, so the solo 401(k), essentially, it’s—most of you probably know what the 401(k) is, right? If you work for a company or worked in the past for a company, many companies offer 401(k) plans. So it is a 401(k), just like that, but it’s in a way simplified, because it’s designed for owners only and their spouses; so it cannot accommodate employees, that’s why there can’t be any full-time employees. Because if there are full-time employees, by law, you must offer them the same retirement benefits, and a solo 401(k) cannot accommodate those. You won’t be eligible then. But if you own a business or you’re self-employed, and you don’t have non-owner employees working for you—by the way, if you’re in a business with your friend or a brother, you can still set up a 401(k). So there can be multiple business owners.

I have an example where I have business with four owners, that are unrelated, but four partners, and that’s what they do – they don’t have any employees, and we set up a solo 401(k). Again, I guess can be a little bit deceiving in this case, because in this case, it’s not just a single owner, there are four partners. But typically, it’s just an owner, and sometimes there is a spouse; if your spouse is also involved in the business and generates or receives compensation, then you can double the benefits. And I’m pretty excited going into benefits, because it’s going to blow your mind.

So it is a 401(k) simplified version – because there is no employees, it’s a lot more easier to administer and to keep track of, because again, if there is a 401(k), with employees, that’s going to be a very complex situation; you need a lot more. But with the solo 401(k), those are very simple.

Joe Fairless: Okay, let’s talk about the benefits.

Dmitriy Fomichenko: So one of the main benefits – again, if you’re a business owner, or if you’re self-employed, you guys probably are somewhat educated on the whole concept of being financially independent, and you probably rread the book Cashflow Quadrant by Robert Kiyosaki. And remember the right side – being a self-employed, being a business owner and investor. So if you’re self-employed or a business owner, you have ability to generate a lot more income. So the more income you generate, the more taxes you pay. That’s a common concern I hear from just talking to people.

Well, if you generate good income and pay more taxes, it’s a great tax shelter, because a solo 401(k) allows you to shelter up to $58,000 a year from your taxes into your solo 401(k). That’s a contribution limit; compare that with $6,000 of an IRA. So you can only put six grand into an IRA and almost 10 times more into a solo 401(k).

Now, if your spouse is also involved in the business, you can double that; think about 60,000 times two – you can put over 100k into a retirement account, shelter that from taxes.

So just think about this – if you drop your taxable income by 100k in a year – well, that for sure will bring you into a lower tax bracket. So you’re going to be paying a significantly lower amount at a lower tax bracket. The savings can be $20,000 or $30,000 or $40,000, potentially.

Joe Fairless: So just so I’m tracking – and I apologize, it’s a dumb question or scenario… But I have a friend, he’s a doctor, he makes – we’ll call it $450,000 a year. And he gets destroyed on taxes every year, because he doesn’t do real estate or anything else. He just does the stock market. If he were to create a business, not a hobby, of being a photographer, and it’s actually a business, not a hobby, and he earns, say $1,000 or, let’s call it $10,000 doing it during the year, so it’s an actual business… The income from his W-2 job as a hospitalist – can he take that and put it towards the $58,000 a year that he can show there?

Dmitriy Fomichenko: Unfortunately not. Again, to give you an example, if he works for a hospital as an employee and he makes $50,000 there, as an example, and he has a side business that he generates $200,000 a year, he can take his self-employment income and put that in his company 401(k). Those are two different companies, unrelated.

Joe Fairless: Got it.

Dmitriy Fomichenko: So in your question, it’s kind of a vice versa. But let’s use that example… If he was a doctor and he was working for himself, if he as a self-employed he earns $450,000, what he can do is he can hire his wife, set up a corporation—this is not tax advice, by the way. I’m just sharing with you some strategies.

Joe Fairless: Yeah, yeah, yeah.

Dmitriy Fomichenko: He can set up a corporation, hire his wife, pay her enough to contribute the maximum, and then they could potentially shelter almost $120,000. So bringing that income down to 300k, and saving just to a lot in taxes.

Joe Fairless: MM-hmm. Got it. Okay. So I hijacked the conversation a little bit when you were talking about the benefits. So you said up to 58k a year versus 6k in the IRA, and if your spouse is in the business, you can double that. What are some other benefits?

Dmitriy Fomichenko: Yeah – so again, it’s one of the first benefits as a high contribution limit tax shelter. Another one is that, like an IRA, you don’t need to have a custodian with a 401(k). With an IRA, you must have a custodian, and a custodian is like a middleman between you and your IRA and your money. And so you have to go — you can self-direct that, but you have to go to the custodian each time.

With a solo 401(k), a custodian is not required. So we set that up, we set up the plan, and we created the trust for the 401(k), and you become the trustee as a client; you become the trustee, and as a trustee, you control it. So there is no middleman; you eliminate all of the custodian, all of the transaction, and asset-based fees, and you can make investment as simple as just writing a check. You can write the check, and they can invest in one of your syndication deals, Joe. It is just that simple.

So checkbook control, high contribution limits. And this plan allows you to have true diversification, because you don’t have limits on the investments. You can invest pretty much into anything. There is a few limitations. We don’t have time to get into that, but your listeners can reach out to me and we can talk about those specifics; but you have virtually unlimited investment options.

Break: [16:52] to [19:33]

Joe Fairless: The other one only had, to the best of my memory, two; one was in collectibles, and the other is something else that [unintelligible [19:40].

Dmitriy Fomichenko: Yeah, collectibles and life insurance contracts, and also the investments that you cannot invest in. And on top of that, you’ve got to remember [unintelligible [00:19:48].14] person and conflict of interest transaction. So the client or the investor or the account holder cannot invest into any transaction or any deal where him and his immediate family members are involved. So those are the only limitations. Other than that, you’ve got total freedom.

Joe Fairless: Why do they have such a high shelter cap at $58,000, versus an IRA being $6,000?

Dmitriy Fomichenko: Again, it’s a 401(k). Many of your listeners might not know, but if you have a 401(k) with your employer, you can put there 58k total. As an employee, you can put $19,500, but there is a way to actually increase that. So with the solo 401(k), it’s a combination of a 401(k) plus profit sharing. So as an employee, you can put $19,500, plus catch-up if you’re over 50. By the way, I didn’t mention that before, but if you are over 50, there is a catch-up of $6,500. So if you’re over 50, you can put in $64,500 as an individual. So that’s what the limit is.

Joe Fairless: Okay, so true diversification, you’ve got the higher limit, and there’s no custodian involved.

Dmitriy Fomichenko: No custodian, yeah. Yeah, let me mention a couple of more. With the solo 401(k), it has a Roth component or Roth provision, allowing you to actually make after-tax contributions. So you can pay the taxes — just like in a Roth IRA, you can pay the taxes upfront, and then you can make a contribution. And the contribution for a Roth 401(k) is $19,500, your employer limit, plus catch-up. So potentially 26k you can put into Roth. Now, it’s going to be after taxes, but it grows tax-free. So you have that.

I spoke with a client just recently, who actually started with me about six years ago, using his Roth 401(k). He started with 100k and he has over a million dollars in his Roth 401(k) right now; that gain is going to be tax-free.

Joe Fairless: What was he investing in?

Dmitriy Fomichenko: He was investing in crypto.

Joe Fairless: Crypto?

Dmitriy Fomichenko: Yeah. I’m not advocating for that. I think it’s a speculation. That’s my personal opinion. That’s a speculation. But people made money there, people lost money. And again, the point is that you can have it. You can slowly invest in syndication deals, Joe, what you’re doing, and you can certainly get to a million dollars over time. It’s a very real possibility.

Joe Fairless: You mentioned a couple other benefits. You just talked about the Roth component.

Dmitriy Fomichenko: Yeah. So the Roth, and also, there is a loan provision. So if you need money for some need, and you want to pull it out from an IRA, there is no way to do that unless you take a distribution. Well, distribution is a taxable event, plus you have to pay penalties. Well, with the solo 401(k) there is the ability to take a participant loan up to 50k for any reason. So think of it, you’re just creating your own bank, and you can access that at any time up to 50k. So it’s a nice feature to have.

Another benefit is that when you invest in leveraged real estate, for example, in a syndication like you guys do, most of them are leveraged, okay? So if you invest in a leveraged real estate deal in an IRA, that will result in unrelated business income tax, because there is an unrelated debt-financed income. So the leveraged real estate in an IRA is taxed, or income, I should say, from a leveraged real estate. Well guess what? A 401(k) is exempt from taxes on leveraged real estate. So that’s a significant benefits as well.

Joe Fairless: When one of your clients has a Schedule C income and you tell them about this, and they say, “Yeah, Dmitriy, it’s still not for me…” If that happens, why does that happen?

Dmitriy Fomichenko: Well, you know what, Joe – I just spoke yesterday with the client, and he actually spoke with, I think, a financial advisor or somebody who told him, “Why are you doing a solo 401(k)? Do a SEP IRA.” So he was a little bit confused. And I said, “Listen, you do your own comparison. You compare them side by side” and I’ve gone over — the contribution limit is the same with the SEP, okay? But I’ve gone over not having a custodian. I’ve gone over not being exempt from leveraged real estate, from EBIT tax on leveraged real estate. I’ve gone over our ability to take a participant loan from the 401(k). You make your own decision. I don’t need to convince you, but you make your own decision. Just look at them side by side and don’t let somebody else make a decision for you. You make your own decision, what’s best for you.

Joe Fairless: What is something that we haven’t talked about, that you think we should, before we wrap up, as it relates to this?

Dmitriy Fomichenko: Well, it’s kind of touching again, maybe emphasizing the point but when I started doing IRAs or self-directed checkbook IRAs, usually people will come up to me, or come to me, they had existing accounts to rollover, either it’s an old 401(k) or an IRA, and they had $50,000, $100,000, $200,000, $300,000 or $400,000 to rollover, because they needed that seed capital to get started.

Well, with the solo 401(k), because of a large contribution limit, I’d say probably 30% to 40% now will start from scratch. They don’t have any retirement accounts, but they do own a business and they make money. So in a year, they can potentially contribute 100k with their spouse combined, and they can really get a good start on their investment endeavors. So that’s one thing.

Another thing is that if you do have existing retirement accounts, you can roll them over into solo 401(k). It does accept rollovers, virtually from any other retirement account, with one exception, and that exception is a Roth IRA. So IRS does not allow you to move Roth IRA into solo 401(k). Other than that, you can move any accounts.

Joe Fairless: Dmitriy, how can the Best Ever listeners learn more about what you’re doing?

Dmitriy Fomichenko: You can always go to our website, which is  sensefinancial.com. And Sense is like common sense. And the story behind the company is because what we talk about here, it just makes sense, okay? Those make sense. Again, make your own decision, but those are financial concepts that do make sense, sensefinancial.com. I’m pretty active on BiggerPockets, so you can find me there. You can also find me on Facebook and LinkedIn.

Joe Fairless: Dmitriy, thank you for being on the show, talking about the solo 401(k), who it’s for, who it’s not for, and what are the benefits for the people it is for. Thanks for being on the show. I hope you have a best ever weekend and talk to you again soon.

Dmitriy Fomichenko: Thank you.

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