Posted about 4 years ago

Solo 401k - Advantages of This Powerful Self-Directed Plan

Solo 401k

Many real estate investors (including BiggerPockets members) have heard about the ability to use self-directed IRA for real estate investing, private lending and other non-traditional investments. However, very few are aware of the existence of a self-directed Solo 401k. And even those who heard about Solo 401k do not have full understanding of the very powerful benefits it offers that are not available with self-directed IRA!

So as an alternative to a self-directed IRA, you should consider truly self-directed, trustee-managed Solo 401k plan. Just like self-directed IRA it allows you to invest in alternative assets, but offers some unique features that are not available with SD IRA, which make this plan superior to SD IRA and Checkbook IRA (IRA owned LLC). Take a look at few:

  • Solo 401k offers Participant Loan Feature which allows you to access your retirement funds any time for any reason (example would be investing in a transactions that would be otherwise prohibited). It's like creating your own bank that will never turn you down. Some may never use this feature, but it is sure great to have this option. With an IRA you can't touch your money until you are over 59 1/2 and if you do - you are taxed and penalized heavily!
  • Roth Solo 401(k) - you can maintain additional, separate 'bucket' under your Solo 401(k) plan where you could make after tax contributions, thus, investing tax free for the rest of your life. The limit on Roth contribution in Solo 401k is up to $23,000 (compared to $6,500 in Roth IRA) and there is no income restriction on contributions unlike with Roth IRA. Also, pre-tax portion could be converted into after-tax (Roth). (Tax professional should be consulted prior doing so).
  • With Solo 401(k) custodian is not required. The plan can be self-administered which could mean significant savings $$ on custodian, transactions and asset based fees that would be there in a case of SD IRA. You also have a checkbook control and don't have to obtain custodian consent when making investments. This could be huge on time-sensitive investments and give great level of convenience.
  • Large contribution limit of up to $57,500 for 2014 (significantly higher than an IRA, which is only $6,500). In additional to all other benefits mentioned above, Solo 401k is a great tax-sheltering vehicle, allowing you to shelter huge amount of money from taxes.
  • When you use financing to acquire real estate in a SD IRA, the portion of the income from the property will be subject to UDFI tax (type of the UBIT of about 35%)! When you finance real estate inside of Solo 401k - it would be exempt from UDFI, which makes it even more attractive to use for real estate investment with leverage.

You should also be aware that while anyone with earned income or existent retirement account can establish self-directed IRA, not everyone will qualify for a Solo 401k (although most people can). Solo 401k can be established by anyone who has legitimate self-employment activity (part time or full time) and who does not have full time employees working for them (by IRS definition "Full Time" is someone who works for you 1,000 or more hours per year). Independent contractor are not considered employees. The business can be in any structure or capacity - LLC, Corporation, Partnership, Sole-proprietorship, etc. It can be a side business in addition to the full time job you have working for your employer. Here are some examples of legitimate business activity:

  • Doctor
  • Attorney
  • Property Manager (even if you manage your own property)
  • Network Marketing Business
  • IT consultant
  • Registered Nurse receiving 1099 income
  • Flipper
  • Wholesaler
  • Day Trader
  • Contractor
  • Independent consultant
  • Reselling items on ebay
  • etc, etc, etc...

Solo 401k subject has been discussed here on BP in great details many times and you can find a lot more info and learn about the experience of those who used it.

The bottom line is you should educate yourself, use resources that are available to you and make informed decisions.

Please feel free to ask any questions you may have below in comments section. 

Comments (21)

  1. Hi I am new at this Real Estate investing, I want to be able to fix and flip homes, but I now have my pension/retirement money in a traditional IRA and cannot take any money out from there to do any real estate transactions due to taxes and penalties, I am now 59 1/2 so I believe I will just be taxed correct? no penalty will apply right? what do you recommend I should do open a Self Direct Ira or a 40K solo, I am also self employed but I am confused as to what I need to be putting into the 401K every month or every year, can you please advise.

    Thank you much,

    Gloria L Delfin

    Ontario, Ca

  2. Hi Dmitriy,

    Your comments and knowledge on Solo 401k are very helpful.  I want to open a solo 401k and here's my situation.  I have quit my W2 job couple of months ago and now live off my rental portfolio income.  I am planning to rollover my employer 401k to solo 401k.  However, I don't have (or going to have) any earned income in very near future.  In that case, I understand that I cannot make new contributions.  But can I do that rollover or not?  Or do I need to wait until (I form an LLC and) start paying a salary to myself? 



    1. Sandeep, Solo 401k plan is designed for those who are either self-employed or have a small business without full time employees. The business and the income must be 'earned', not 'passive'. The income from rental properties is 'passive' in it's nature and you can't use it to make contributions to a retirement plan. 

      In order to establish a Solo 401k plan you need to have a business or self-employment activity in place. Do you have that?

  3. Hi Dmitriy, for numbers sake.. say you have 200,000 in a solo 401k and a property you wanted to purchase within it was 150,000.  The property being a rental would bring in 1,500 a month in rent .Is that 1,500 considered a automatic contribution to the 401k seeing that it is all held within the 401k? Or is it only the income that is made from the business that the 401k is held in, which in this case is hair salon. Don't really understand the contributions part. Our funds in the 401k were rollover from a former employer and we weren't necessarily looking to the contribute to it, just wanted to use for holding/flipping realstate.....Thanks Linda

    1. Linda, if your Solo 401k owns an income producing property, that income goes into 401k account but it is not considered a contribution to the 401k. It is considered to be an investment returns (or return on investment). There is no limit on how much income your investments could generate. But there is limit on the new contributions you can make into your 401k. That income is based on your business income and is limited to $53,000/yr. Details on that at the following link:

    2. Also, you are not required to make annual contributions to your Solo 401k plan, however you should be making occasional contributions otherwise your plan may be deemed disqualified. You mentioned that you are considering flipping properties in your 401k? Flipping is considered an active business therefore income from this activity will be subject to UBIT (Unrelated Business Income Tax). I suggest to consult with your CPA or another experienced in this area tax professional to understand the consequences of running an active business out of your 401k before engaging in it.

      1. Dmitriy, thank you so much!....You have been very helpful and you make it all make sense. Unfortunately the company I went through to get our solo 401k doesn't seemed to have time for my nonsense questions...Wish I would have known of you before. Thanks again....Linda:) 

      2. Linda, I'm sorry to hear about your unpleasant experience with the other company. Please contact our office and request consultation with me, let's talk and see it we could possibly take over the servicing of your plan and provide you with the excellent service every client deserves.

  4. Hello Dmitriy,

    I am a full time employee with a company based 401k.  I would like to use some of that money to put towards a down payment of a property.  What would you recommend that I do?  Is a Solo 401k an option for me or will I have to use a self-directed IRA?  What would be the tax and withdrawal implications?

    Thank you,

    1. Sonny, thanks for visiting my blog, I'll be happy to help.

      First, if your employment is the only source of income for you then you don't qualify for a Solo 401k. However, if you have a side business or some sort of self-employment income in addition of your full time job - then that opens up a possibility for you for a Solo 401k (pls contact me for details).

      Second, if you wish to use some of the funds from your employer 401k you should inquire if your plan offers loan feature (check with your plan administrator or HR dept). In this case you could borrow from the plan and then use those funds as you see fit (including down payment for a property). BTW, is this an investment property or a residence?

      You also have another option - that is use self-directed IRA or self-directed Solo 401k (if you qualify) to purchase property inside of your retirement account. This will only be possible if your plan allows what's called "in-service distribution". The chances of that are small.

      And lastly you can take a premature distribution - in this case the amount of distribution will be subject to taxes and penalties. I would not recommend this option, this would be poor financial choice. 

      Hope this helps.

  5. Good and interesting article, @Dmitriy Fomichenko .

    Could you please tell me if I understand the following correctly?

    • The amount of money contributed to the SD401k is limited to the the income made from the self employment activity. So if I formed a company to manage my rental property and I only made $5000 a year doing that, then that would be all I could contribute to my 401k.
    • I can't roll over my existing IRA money into a 401K. I have to bootstrap the fund from zero.



    1. Scott, good question. The Solo 401k plan can be funded in two ways:

      1. Contributions. So your example above is correct. The contributions are based on the earned self-employment income.

      2. Rollovers. The account can also be funded with rollovers from other qualified retirement accounts (IRAs, 401k, 403b, etc.). There is no limite on how much you can rollover. If you have $1MM in your 401k with the past employer - you can rollover the entire balance.

      Hope this helps and if you need further clarification please feel free to contact me. I always offer free consultation to BiggerPockets members. 

      1. Ah ha, thanks. I did not realize it was possible to roll money into a 401k. I thought you could only roll money into IRAs.

  6. Daniel, we'll have to discuss the partners situation, I need to clarify that, call me.

    The contributions to your Solo 401k are based on the earned self-employed income, sale of the personal property, or sale of the rental property, or income from your W2 day job (if you had any) would not be considered self-employed income. Basically you need to show income that is subject to self-employment tax.

    Yes, you can do a direct rollover of most retirement accounts into Solo 401k (Roth IRA is the only exception). You can do the conversion into Roth 401k AFTER, not before. 

    Hope this helps!

  7. Dmitriy,

    Thanks for the great summary of the Solo401K. I have a few questions for you. 1) I am self employed but have two other partners in my business and we use sub-contractors - NO employees at all. It is still available with the partners involved in the business with me? 2) Is it limited to my 'earned income' from the business? Specifically say I make 30K from my business, but I also sell my personal home that year and have 100K left over.... can I put over the 30K that I earned? 3) Can I roll from a former employers SIMPLE plan into a Solo401, and if I wanted to convert that to ROTH should that happen before or after the roll?

    Thanks, Dan Dietz

  8. Mitrah, I'll be glad to discuss this with you. Please feel free to contact me directly at 949-228-9393.

  9. Hi Dmitriy, I just purchased some land and a trust deed this past weekend and was getting ready to transfer funds from my Fidelity IRA over to an SDIRA with a company called BuyPD that uses Accuplan as the custodian.  They have waived most of the fees so all I am paying is $395/year if I go with them, but I just came across this concept of a solo 401K that would skip the custodian step and allow me to be the trustee.  Time is of the essence, as I need to fund my deals, so I am wondering if you can recommend a vendor that you currently work with?  I'm currently reviewing options with Vanguard and MySolo401K.  I am 34 years old and am not planning on making any withdrawals, this is more of a long-term portfolio strategy, so I'm also trying to figure out if the Roth or non-Roth solo 401K is better for me for tax purposes as well.  Any additional advice you can offer for my case would be much appreciated.  Thanks!

  10. @Brent Ecton 

    I'm glad you enjoyed reading the article! Feel free to contact me directly should you have any questions.


    - Dmitriy

    1.  Great article @Dmitriy Fomichenko ...  I've been curious about this for a while.

      I want to create a solo 401(k) and transfer from a previous employer's plan.  Can I use my new plan to purchase properties (title the property to the plan) and then sell the property (refinance it) with the title in my LLC company's name?

      So cash purchase property for $100k and plan has title.

      Refinance / sell property to my LLC for $105K, put $105K back in plan and title property in LLC.

      1. Hello Shawn, what you describing is a Prohibited Transaction. Since you own the LLC - it would be considered a disqualified person. Any transaction between the plan and a disqualified person would be illegal. 

  11. Wow, I never knew there was an even better tool than the SDIRA!  Thanks @Dmitriy Fomichenko I will continue to study and follow this subject.