Real Estate Investing via self-directed Solo 401k

9 Replies

Hi everyone!  

I'm a newbie currently doing a house hack.  I'm hoping to continue investing and would like to use rollover funds from a previous employer to a self-directed solo 401k for the purchase of my next property.  I recently reached out to a CPA to see if I could get more information on the tax implications of pursuing this path of investing.  He basically told me this was a horrible idea and it's virtually impossible to do this type of investing without violating IRS rules and coming out with a huge tax bill.  I would love it if the community could provide some tips on pursuing this route of investing.  Would love to hear some feedback on methods for doing this safely and within the constraints of IRS requirements. 

Thanks!

@Ellen Daniel

Welcome to Bigger Pockets! While there are some key concepts to understand before jumping in (such as the prohibited transaction rules), self-directed investing can be a really powerful alternative to keeping retirement funds locked into the stock market. Some CPAs has a healthy concern when advising clients and others either have ulterior motives or a lack of understanding that leads to an overstatement of the risks. There is a lot of information on BP about self-directed IRAs and Solo 401k plans. Many people are using the accounts with great success. I'd recommend reaching out to a few providers who can give you a better idea of your options and the pitfalls to avoid. You can also get referrals to CPAs who are more realistic and knowledgeable about these structures.

@Ellen Daniel

Self Directed Retirement Funds are foreign to some people and are not a typical strategy offered by Merrill lynch or other investment managers who invest in the stock market. Learn as much as you can about prohibited transactions and how to invest with these types of funds. I have a self Directed Ira and my BRRRR projects I use private investors who for the most part are funds from a sdrf. Check out Mat Sorensen who wrote "The Self Directed IRA Handbook". He also hosts a podcast with Mark Kohler. A lot of good information on SDRF.

Originally posted by @Ellen Daniel :

Hi everyone!  

I'm a newbie currently doing a house hack.  I'm hoping to continue investing and would like to use rollover funds from a previous employer to a self-directed solo 401k for the purchase of my next property.  I recently reached out to a CPA to see if I could get more information on the tax implications of pursuing this path of investing.  He basically told me this was a horrible idea and it's virtually impossible to do this type of investing without violating IRS rules and coming out with a huge tax bill.  I would love it if the community could provide some tips on pursuing this route of investing.  Would love to hear some feedback on methods for doing this safely and within the constraints of IRS requirements. 

Thanks!

 1. First, in order to set up a Solo 401k you must met the eligibility requirements:  (i) you are self-employed; and (ii) you do not have any full-time w-2 employees (i.e. working 1000 hours or more per year) working for your self-employed business or otherwise working for you. If you do, you would be eligible to establish a self-directed Solo 401k which allows for investing in real estate.

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. All of the income and expenses will need to flow in and out of the retirement account.

4. If you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira...

5. You can't live on the property or otherwise use it for personal use.

6. You can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. You must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. You should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job). 

@Ellen Daniel Aside from the legal / IRA "things" to consider keep in mind that's a real long term play.

I have a piece of property bringing in $1,100 monthly and is virtually all profit monthly (Trailer Lot and Metal Shop). I regret putting in my SD IRA and not just putting under my LLC. Even though that money / land / income is mine, I have less flexibility with that I can do with it. I know SD IRA and Solo 401K are not the exact same, but similar.

@Ellen Daniel ,

If you are eligible you can set up a truly self-directed Solo 401k plan, fund it with a rollover from any other retirement account you have except Roth IRA and start investing in alternative assets such as real estate.

Here is a related discussion on the topic which you may find helpful and connect with other members who are doing the same thing:

https://www.biggerpockets.com/forums/51/topics/527877-self-directed-solo-401k-for-real-estate-investors-q-and-a

Good luck! 

@Ellen Daniel after reading ‘Raising Private Capital Building Your Real Estate Business Empire Using Other People's Money' by Matt Faircloth, I learned that it is typically best to passively invest self directed IRAs and 401K's. It can be very costly to pull money out of them early like the CPA advised. On the bright side, there are ways you can invest that money as a passive investor into real-estate deals of an active investor. For instance, you could provide that money to a flipper who has a good deal that generates 8-10% (possibly more) ROI. If the deal works out, you could repeat the process. Granted Matt's writing the book from an dealmaker's perspective looking for private money, it seems to be sound advice. It can be a nice way to build your retirement account while still being involved in real-estate.

@Ellen Daniel

I have the same plan. I have 20yrs with my full time job with a 401k. I also have a pension with them that has a cash payout benefit if I leave the company.

I make a small 12k-15k a year in a small venture as a independent contractor. I receive a 1099 each year.

I opened my Solo401k at end of 2018 for the sole purpose of rolling my funds in the next 4-6 years if I decide to leave or during a force reduction. It also helps with a little lower taxes each year. Plus, I can do taxes and then still put money in 401k for last year up until the date I file if I find it is a big tax benefit.

If I continue to work after 5 years, I will consider rolling some funds to Roth as our income should go way down when my wife retires.

Good Luck!!!

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here