Does 401K Count for Accredited Investor Status?

With all the benefits of becoming an accredited investor, a lot of investors wonder if they can fit the bill and earn that status themselves. After all, accredited investors have access to investment opportunities that are not available to others. This means they have the potential to earn more than investors who only have access to public assets.

The reason the US Securities and Exchange Commission (SEC) limits access to certain investments is because these are generally riskier investments. Therefore only those with a big enough financial “safety net” are allowed to join. The idea is that accredited investors have a big enough net worth that they can be protected even if an investment does not work out. Having that accredited investor status also means that you are a more experienced investor and therefore capable of assessing these risks.

Here we will define what an accredited investor is, and whether or not a 401(k) plan counts towards the accredited investor status.

Who are Considered Accredited Investors by the Securities and Exchange Commission?

In order to become an accredited investor, you have to follow the guidelines of the SEC and meet their requirements.

According to SEC rules, certain investments do not have to be registered as long as companies and private funds are able to sell the assets to accredited investors. These investments, while riskier, are also potentially more lucrative. This is one of the reasons why the accredited investor definition is worth discussing.

Accredited investors are able to invest in private equity investments, private placements, hedge funds, equity crowdfunding, and venture capital firms. Aside from private equity funds, accredited investors are also able to invest in real estate syndication, which is another type of investment that is exclusive to them. [1]

The SEC’s definition of an accredited investor determines who can take part in these lucrative investment opportunities.

According to Regulation D of the Securities Act of 1933, an accredited investor is someone with an annual income of at least $200,000 over the past two years, with a reasonable expectation that they will earn the same amount in the present year. For married couples, a joint income of $300,000 is required. [2]

Another way to determine if you qualify as an accredited investor is with a net worth calculation. An accredited investor is an individual with a net worth that exceeds $1,000,000. Keep in mind that the value of your primary residence is excluded from the net worth calculation. [1]

The SEC also amended their definition of an accredited investor back in August 2020, to include even more people. This means more investors can participate in things like private placements and syndication deals. [3]

The SEC has expanded the definition to include investors with certain professional certifications like those who hold Series 7, 65, or 82 licenses.[3]

Limited liability companies (LLC) with $5 million in assets also fall under the new definition of accredited investor. This also goes for Indian tribes, government bodies, and entities or funds that are organized under the laws of foreign countries that own investments over $5 million. [4]

Accredited investor status is also given to knowledgeable employees of a private fund, including directors, board members, and general partners.[3]

As for married couples, the SEC has expanded on the definition to also include “spousal equivalent”, meaning those who are not legally married.[5]

Does 401k Count for Accredited Investor Status?

A 401(k) plan is a retirement savings plan that gives tax advantages for the saver. Named after a section of the US Internal Revenue Code (IRC), an employee who signs up for a 401(k) agrees to have a percentage of their paycheck paid directly into an investment account. [5]

The employer who offers this savings plan may match part or all of that contribution paid by the employee. The employee also gets to choose from a number of investment options, including mutual funds. [5]

With your Solo 401(k), you can access a wide range of potential investment opportunities. The only thing keeping you from participating in private placements is the SEC Rule 144A, which is a government regulation that limits private placements to accredited investors. [6]

Your Solo 401(k) may play a role when it comes to determining your status as an accredited investor. If you are the trustee of your Solo 401(k) and your combined assets meet the $1 million threshold, then you and your Solo 401(k) should qualify as accredited investors. [6]

How to Become an Accredited Investor

Contrary to popular belief, there is actually no official accreditation process that determines if a person qualifies as an accredited investor. There is no agency or independent body that reviews the credentials of an investor and gives them an ID saying they are accredited. [7]

Instead, the investment vehicle itself has the burden of checking whether a prospective investor falls under that category. They may ask for the investor’s financial statements, tax returns, and other requirements to determine their status as an accredited investor. By proving their financial sophistication, their net worth, and their annual income, an investor can gain access to exclusive investments.

The screening process is done by investment managers. In terms of your 401(k), the investment manager may also look into it to see if your combined assets can meet the criteria.

While the SEC itself does not have an accreditation process, it does require anyone selling to accredited investors to take certain steps to verify their status. This may involve a questionnaire and several financial attachments that show income.

Accredited investors may also submit letters from reviews by tax attorneys, CPAs, investment brokers, and advisors. Once their status has been confirmed, they can participate in the investment.

Multifamily Syndication: Investment Opportunity for Accredited Investors

Many accredited investors go for hedge funds and venture capitals, but there is another form of investment that you should look into if you are interested in opportunities that are exclusive to accredited investors. Real estate syndication is for accredited investors who want to get into real estate but don’t want the hassle of managing a real estate property.

A syndication deal involves multiple investors pooling their resources together to buy a single real estate property. [8]

Real estate syndication can be done with almost any kind of real estate property, but multifamily properties are the most popular investments for this type of deal. This is because multifamily real estate properties are larger, have multiple units, and can generate a strong, consistent cash flow. With apartment complexes and condominiums, you don’t have to worry about vacancies, unlike with single family units. You can still earn monthly rent from the remaining units even if one or two become vacant.

Multifamily properties are also more expensive and therefore harder to obtain if you are a lone investor. With a syndication deal, you can participate in real estate investing without having to spend as much money. [8]

In a real estate syndication, a syndicator puts the deal together and locates the real estate property. They will coordinate the funding and look for investors who will participate in the syndication. Most multifamily syndication deals are only accessible to accredited investors.[7]

These accredited investors will provide most of the capital needed to purchase the property. In exchange, they can get equity upon resale once the deal is done, as well as a share of the cash flow, depending on how the fund is structured. [8]

Because the syndicator will also take care of property management, this is a truly passive investment opportunity for accredited investors. You can diversify your portfolio by going into real estate without actually becoming a landlord.

The syndicator may manage the property themselves or hire a property management company. Either way, passive investors do not have to worry about collecting the rent, handling emergencies, dealing with tenants, paying for repairs, etc. You get to enjoy all the benefits of owning multifamily real estate without the associated hassles.

For the purposes of multifamily syndication, a limited liability company or a limited partnership (LP) may be formed. [8]

While most of these syndication deals are exclusive for accredited investors, some are accessible to sophisticated investors as well.[9]

A sophisticated investor is someone with enough experience and knowledge about financial and business matters. So even without the net worth verification or the annual income, they can still evaluate the risks of certain prospective investments such as real estate syndication deals. [9]

The SEC allows up to a certain number of sophisticated investors to participate in these real estate syndication deals. But most participants are still going to be accredited investors.[9]

Sophisticated investors have to rely on their network and connections to find these syndication investment opportunities because syndicators are not allowed to advertise investments to non-accredited investors.[9]

Multifamily syndication is one of the most reliable sources of passive income for accredited investors, and it should help you diversify your investment portfolio.

Why Invest with BAM Capital for Multifamily Real Estate Investing

If you want to invest in multifamily apartment complexes without the headache of running them yourself, you should work with BAM Capital.

BAM Capital is an Indianapolis-based syndicator that prioritizes Class A, A-, and B++ multifamily real estate properties in the Midwest. They help accredited investors grow their wealth through syndication using their award-winning multifamily investment strategy. [10]

This syndicator mitigates investor risk using a vertical integration strategy that creates forced appreciation. BAM Capital has a consistent track record and is known for offering safe and passive real estate investments for their accredited investors.

BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. Their vertical integration strategy has worked wonders for the company so far. In fact, BAM Capital currently has over $700 million AUM and 5,000+ units. [10]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions. Accredited investors can schedule a call with BAM Capital and invest today.