Opening Self Directed Retirement Account

5 Replies

Welcome Everyone,

I'm a new BP member and a novice Real Estate investor. I'm determined to move my IRA funds from traditional to self directed accounts. I was hoping fellow members of this forum would be able to help me with that and share their knowledge and expertise on this subject.

Currently I'm full time employed, but I also own two (really) small businesses - one in a single member LLC that buys properties and collects rent from residential tenants, the other is a sole proprietorship technology company with just a handful of long term clients. The LLC generates more substantial income, and I was wondering if I could use it to sponsor a Solo 401k...? Can I have two such plans (one for the LLC, and one for the Sole Proprietorship)...? Does it matter that I also have a traditional 401k sponsored by my current employer...?

I have couple of old IRAs (Traditional Rollover and Roth). Assuming I can open a Solo 401k, would I be able to roll them into it...?

My wife is a real estate broker, but also owns a property management single member LLC, with just one customer...;-). I would assume that LLC would be suitable to sponsor her Solo 401k, right?

Again, assuming we can open one or multiple Solo 401k plans, would they be able to invest in the already existing LLC I own as a single member...? I'd like to use that funding to finance flips and possibly other real estate related activities (notes, mortgages, etc...).

What are the main aspects of choosing Solo 401k custodian...? Would you recommend any...?

Many thanks in advance for your time and advice!

@Robert B.

It sounds like you qualify for a solo 401k plan.The following IRS website sheds light on self-employment requirements.

1. The rules allow contributions to multiple retirement plans. You could open one solo 401k plan for all of your self-employed businesses and contribute to the solo 401k. This is in addition to making contributions to your day-time job 401k. See following IRS website for more on this:

2. Yes the IRS rules permit for the transfer of IRA funds to a solo 401k plan; however, the Roth IRA rules do not allow for the transfer of Roth IRA funds to a 401k including a Roth Solo 401k. See IRS Pub. 590 for more on this Roth IRA transfer restriction. The reason for this restriction is that the Roth 401k distribution rules are different then the Roth IRA distribution rules.

3. Per IRS Pub. 560, part-time self-employment qualifies for opening a solo 401k.

4. No the solo 401k owner is not allowed to invest his solo 401k funds directly in his own self-employed LLC; however, the Rollover as Business Start-up (ROBS) 401k does allow for this provided it is a C-Corporation among other requirements. See following IRS website for rules regarding the ROBS 401k.

Thank you @Mark Nolan for this prompt and very informative response! Very much appreciated! 

I understand that once the individual Solo 401k plans are created and funded, we (or rather "they" - the Solo 401k plans) will have to form a new C-Corporation, which will then be able to conduct any real estate business (or any business for that matter). Obviously I will research the subject some more, but that's how I understand the overall concept... Am I correct...?

Once again, thanks for all the help and direction!

@Robert B.

The C-Corp is only necessary if you are seeking to finance your own business using 401k funds. This concept is referred to as the ROBS 401k.

@Robert B.

In addition to Mark's comprehensive answer I'd like to add that opening multiple plans don't make sense because you still would be subject to the same contribution limit per individual. 

Also, the rental income from properties is considered to be passive income and therefore can not be used to calculate your Solo 401k contributions. Only active, earned self-employment income would qualify. 

Great point @Dmitriy Fomichenko . Thanks for that tip!

In our particular situation then, we will setup two Solo 401k: one for my wife, sponsored by her property management LLC, and one for me sponsored by the technology Sole Proprietorship (and not by the property holding LLC). That way we both would be able to rollover our old Traditional IRAs into those plans. She would then be able to contribute to her plan up to the allowable limit, whereas I would continue to max out my day-job employers traditional 401k plan in anticipation of rolling it into my Solo 401k in the future (after severing employment).

In the meantime we would like to use those Solo 401k's to invest in real estate flips. Thanks to @Mark Nolan I understand that we would not need to create a separate C-Corporation, just buy and sell properties in the plan's trust name. The only drawback I can see in this scenario is that my wife would likely not be able to represent the plans as real estate agent (i.e. earn commission) in those transactions, as she would be considered disqualified person, right? So, if we were indeed to create a real estate development C-Corporation would that Corporation be able to "employ" my wife...?

Thanks in advance,


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