What is a solo 401k and why should i have one if I'm starting out

6 Replies

My wife and I would like some information about a solo 401k 

We have decided to invest in real estate and would like to invest under a LLC.

I read a few post about solo 401k but I'm unsure of the benefits. 

My questions are :

Why should i open a solo 401k ?

Who can I go to so i can open a solo 401?

How do investors use the solo 401k for their benefits ?

Thank you BP community for any help offered. 

Originally posted by @Joe Khan :

My wife and I would like some information about a solo 401k 

We have decided to invest in real estate and would like to invest under a LLC.

I read a few post about solo 401k but I'm unsure of the benefits. My questions are : 

Why should i open a solo 401k ? Who can I go to so i can open a solo 401? How do investors use the solo 401k for their benefits ? Thank you BP community for any help offered.


You can, but in my opinion the benefits are questionable in real estate investing. It seems to be an afterthought for people who have already invested in the stock market and want to switch to real estate. Their company set up a 401(k) in a mutual fund or some such thing made up of stocks. To really make your money grow you use real estate. It will slow you down if you are investing out of a 401(k). Real estate investing properly has no tax liability (or very little). When you are dealing with a 401(k) you are restricted by rules and by time to get access to your money. You don't even need an LLC. You can get umbrella insurance which is cheaper, does a better job of protecting you and is easier to maintain.

@Joe Khan

In this community, many use a Solo 401k to invest retirement funds in real estate or other alternative investments.  Below are issues to consider as you evaluate this option including issues to consider in chooising a plan provider.

Solo 401k vs Self-directed IRA:

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

  • Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
  • Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

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. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and 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... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, 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. In either case, 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. In either case, 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).

Considerations in Setting up a Solo 401k to invest in real estate:

1. First, you must be eligible to set up a Solo 401k. In order to be eligible, you must be self-employed (e.g. providing goods and/or services through your personal effort), reporting self-employment activity on your taxes (e.g. Schedule C if you a sole proprietor) & 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.

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).

Considerations in Choosing a Solo 401k Provider:

1. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

2. You may wish to confirm that the new 401k provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

3. You may wish to confirm that the new 401k provider will handle the ongoing compliance support such as any required 5500 filing (e.g. 5500-ez for a one-participant plan with assets in excess of $250,000), any required tax reporting (e.g. 1099-r in the event of a distribution or in-plan Roth conversion), mandatory plan updates and amendments, etc.

4. If you might take a 401k loan, you may wish to confirm that the new 401k provider will prepare the required 401k participant loan documents.

@Joe Khan

First, self-directed Solo 401k is not for everyone. To be eligible you must have legitimate self-employment activity or own a business without full time employees (other than you and your spouse) that generates earned income.

Second, you CANNOT use Solo 401k for your personal benefits. This is a retirement account, which means that you get to use it for your benefits when you retire, not now.

If you are eligible, a truly self-directed Solo 401k plan offer several great benefits such as large contributions (excellent tax shelter), low cost and the ability to invest your retirement funds into alternative assets. 

Here is an in-depth discussion on the topic that you may find beneficial: 

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