Solo 401K for real estate purchase

15 Replies

Hi everyone,

I'm leaning towards opening a solo 401k vs a SDIRA, for buying and holding multifamily properties. But I have a question that I would like answered before I can make a final decision.

My question is, I understand all expenses and rental income go into and out of the account. But, after I buy and hold, which is what I intend to do, how long must I have an account thru the company that sets it up for me. I know the solo 401k account at the bank will be open, because of the income and expenses of the properties. But if I use "xxx401k" company to set it up and all necessary paperwork, will I have to pay the yearly maintenace fee for ever? Even after I buy 5 properties, and am just sitting back collecting rental income.

I didn't find anyone mention this. This would be the final determing factor of a solo 401k vs SDIRA. Paying a few hundred dollars a year for 20 or 30 years? And I assUme the yearly maintenance fees would increase at some point. 


@JC Conchas

The answer will depend somewhat regarding which variety of service provider you choose, but the key answer is; yes, there will be ongoing fees of some kind.  A 401(k) is not just "an account", it is a qualified employer retirement plan.  At a minimum, the plan needs to be kept current with tax code changes via an amendment process.  Most plan providers offer this service at a reasonable annual subscription rate.  You will also likely want access to expert guidance in case there is a change in your investment strategy or an issue that comes up over the course of your investments for which you need help.


The benefits of the truly self-directed Solo 401k plan outweigh SDIRA significantly, if you qualify for it. Yes, there will be a nominal annual fee, but comparing with SDIRA you can eliminate all transactions and asset-based fees associated with the IRA custodian. You can have "checkbook control" over your retirement funds, not pay any taxes on leveraged real estate, have greater protection from creditors, more flexibility and control, ability to access up to $50K of your retirement funds prior to retirement tax and penalties free using participant loan feature and more!

Reputable Solo 401k provider will take care of all required plan updates to keep you IRS-compliant and provide all the guidance and support you need. Paying couple hundred dollars a year for a vehicle that can generate millions of dollars for you over next 20+ years is pocket change and would be significantly less compared to IRA custodial account.

My mother has a SDIRA and I have a solo401K (thanks to Dmitriy.) The solo401K is much easier to manage and much cheaper. IMO opinion it is the way to go if you have any self-employment income whatsoever.  My mother was already retired when she set up her SDIRA (at my advice) so she didn't have any other option. 

Thanks for all the advice. I'm in, going with Solo 401k. 


@JC Conchas

Generally, if you're eligible for a Solo 401k, you'll be better off going that route rather than an IRA. Compared to an IRA, Solo 401k contributions limits are roughly 10x higher and there is no custodial requirement for the 401k. You can take participant loans from the plan, you don't need the additional expense and administration of an LLC to have checkbook control, and there is a built in-Roth component. A spouse can also participate in the same plan, there are additional tax benefits compared to an IRA, and there is generally greater privacy. Finally, the plans are often quicker to setup and cost less money over time especially compared to most IRA LLCs.

Kingdom Trust offers IRA custodianship for $125 a year if you use an IRA owned LLC for checkbook control. This is actually cheaper than the yearly fees I see with many of the Solo 401k guys.

I've personally vetted them and set up IRA owned LLC's with them (since my firm sets those up), but if you need any help or info on getting involved with them let me know

@Scott Smith ,

while IRA LLC is comparable vehicle it is not as good as the truly self-directed Solo 401K plan, so if someone is eligible it would still be superior option. The superior features are:

- contribution limits 10X higher

- greater protection from creditors

- checkbook control without custodian and LLC

- access up to $50K tax and penalties free before retirement via participant loan feature

- tax-free investing using Roth sub-account

- exempt from UBIT on leveraged real estate

Those are some major advantages, but there are more.

Also with IRA LLC besides the custodian fee there might be fee to the state for the LLC, registered agent fee and possibly other fees.

I know everyone has an issue with fees on SDIRAs and Solo Ks; however, just as you need legal, tax and accounting guidance, the guidance you get from a custodian in order to avoid prohibited transactions is invaluable. The fees most custodians charge are extremely reasonable considering the time staff typically spends with their clients and prospects and other functions.

Even though I am responding as a custodian, I do believe these fees are something to be looked at the same way you look at the other professionals you engage.

Most of the prohibited transactions we find are in single member LLCs where no one is looking at the transactions and decisions the IRA owner makes. Something as simple as the IRA owner signing off on a credit card application for the LLC will result in a prohibited transaction and most would not think about that.

The same issues apply when using a Solo K without a custodian to review your transactions.

Prohibited transactions result in onerous fees to an ERISA specialist in order to try and correct it. If it can't be corrected, the prohibited transaction results in penalties, taxes and fines that could wipe out your entire retirement savings.

Believe me, you want a capable custodian handling your accounts and reviewing your transactions for peace of mind.

Just my opinion. Please note, however, that this was my opinion well before I got into this business.

Best regards and good luck,

Jaime Raskulinecz

@Dmitriy Fomichenko I completely agree, I think the IRA accounts I see are typically ones that people of had set up through employers or for the rare occasion when someone has also maxed out their solo 401k. Just as an FYI I have contacts at Kingdom Trust to be the custodian for $125/year if the IRA owner is using an SDIRA LLC/Trust. Cheapest I've been able to find

@JC Conchas

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

  • Both were created by congress for individuals to save for retirement;
  • Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
  • Both allow for Roth contributions;
  • Both are subject to prohibited transaction rules;
  • Both are subject to federal taxes at time of distribution;
  • Both allow for checkbook control for placing alternative investments;
  • Both may be invested in annuities;
  • Both are protected from creditors;
  • Both allow for nondeductible contributions; and
  • Both are prohibited from investing in assets listed under I.R.C. 408(m);

The Self-Directed IRA and Solo 401k Differences

  • In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
  • To open a self-directed IRA, self-employment income is not required;
  • In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
  • The solo 401k allows for checkbook control from the onset;
  • The solo 401k allows for personal loan known as a solo 401k loan;
  • It is prohibited to borrow from your IRA;
  • The Solo 401k may be invested in life insurance;
  • The self-directed IRA may not be invested in life insurance;
  • The solo 401k allow for high contribution amounts (for 2017, the solo 401k contribution limit is $54,000, whereas the self-directed IRA contribution limit is $5,500);
  • The solo 401k business owner can serve as trustee of the solo 401k;
  • The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
  • When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
  • Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
  • When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
  • Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
  • Pre-tax IRA contributions on reported on line 32 of Form 1040;
  • Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
  • Roth solo 401k funds are subject to RMDs;
  • A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
  • Roth IRA funds are not subject to requirement minimum distributions (RMDs);
  • The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
  • The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
  • At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
  • At termination, the self-directed IRA is only required to file a form 1099-R.
Originally posted by @Jaime Raskulinecz :

I know everyone has an issue with fees on SDIRAs and Solo Ks; however, just as you need legal, tax and accounting guidance, the guidance you get from a custodian in order to avoid prohibited transactions is invaluable.

Jaime, is it common for custodians to provide advice on prohibited transactions and other tax or legal issues?

@Justin Windham As you probably already know, self-directed IRA custodians do not give advice on tax or legal issues. However, if clients run investment scenarios by us, we can typically let them know if they are heading in a direction that would result in a PT. Again, if an investment is very complicated we would advise speaking to a legal or tax professional specializing in these regulations.

@Jaime Raskulinecz

Understood. Though this is probably why some people have issues with custodial fees, especially for Solo 401k plans which do not require custodians. If someone can have direct checkbook control and the same guidance from a plan provider without having to pay asset and transaction fees to a custodian, they may prefer going that route.

@Justin Windham I do get it. However, as a Solok custodian do you give guidance on transactions? We see most prohibited transactions occur within Solo ks where no one is looking at transactions or in single member LLCs where it's the same. One of the most common mistakes is the owner of the IRA with a single member LLC signing off as a guarantee on a credit card application. There are more mistakes, of course, but if the client ran things by a custodian they may be able to avoid doing something prohibited.

As you also know, a prohibited transaction can wipe out retirement savings. 

@Jaime Raskulinecz

Although we do not serve as custodian (there is no custodial requirement for the Solo 401k), we do offer guidance on transactions. I agree, many mistakes can be avoided with a little "look before you leap." Yes, IRAs in particular have severe PT penalties. 

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