Solo 401K for LLC and S-Corp

8 Replies

All, I've read there are better tax advantages for using an LLC for rentals and an S-Corp for flipping. I have had an LLC and recently set up an S-Corp to start doing rehabs. I like the control features of the Solo 401K, however, will I need to set up one each for the LLC and the S-Corp? I have done nothing yet.

@Michael Hammond

According to my understanding of the LLC and S-corp. you are correct. But taxes are not my specialty, I suggest you reach out to @Brandon Hall , he is one of the experts in this area and writes regularly for BP.

Regarding setting up a Solo 401k - you can't setup two plans, but when you do you should use your S-corp, not the LLC since you can only use earned income to make contributions to the 401k. Rental income in your LLC is considered to be 'passive' not 'earned' and therefore is not eligible for contributions to the retirement plan.

Hope this helps.

@Dmitriy Fomichenko thanks for the mention. 

@Michael Hammond you've described the typical entity structure, however, I've found after working with all of my clients that every situation is unique and "typical" rarely makes sense. It's best to consult with a CPA and attorney to be advised on both the tax and legal issues with your entity structure. 

Hope this helps!

@Dmitriy Fomichenko @Brandon Hall Gentlemen, thank you for the quick responses. I think I got it now. For rentals under the LLC, I should use the SDIRA. For flips under the S-Corp, the Solo 401K. Thus, it's two entities w/ two distinct purposes and thus two distinct alternative investment accounts. The reminder about "passive income" triggered my thinking.

@Michael Hammond

You are mis-understanding the linkages here.

A Solo 401k is a retirement plan that requires you have some form of self employment to sponsor the plan.  Passive investments are not such employment.  An active business such as flipping properties is.

As such, you could tie the Solo 401k to the S-Corp you use for flipping and that would allow you to set aside some of the earnings from flipping into the plan - thereby reducing your taxable income and helping you save for retirement.  

In addition to making new contributions to a Solo 401k, you could rollover an existing tax-deferred retirement plan into that Solo 401k.

On the other side of the equation is the use of a self directed plan. With the self directed Solo 401k, you could hold passive rentals, flip houses, be a hard money lender, etc. All investments must be at arm's length, so plan investments do not intersect with your personal investing in any way. All returns generated from such investments go back to the plan on a tax sheltered basis. A self directed IRA or 401k is a means to diversify your retirement investing into the opportunities you know and understand in real estate.

There is a differentiation within a tax-sheltered plan between passive and active business investments as well.  Income from passive sources such as rents from real property and interest on a note are 100% tax sheltered.  Flipping houses is considered a business, and when a tax-exempt entity engages in a business on a regular or repeated basis, UBIT taxation applies.  

There is a lot on these topics here on BP, and a conversation with an expert in the field as well as with your CPA will be the best way for you to narrow things down to a solution that will best suit your particular situation and goals.

A solo 401k is only for an individual not for any type of business entity. You can contribute money paid or distributed to you personally from your companies though. 

Originally posted by @Rodney Henson :

A solo 401k is only for an individual not for any type of business entity. You can contribute money paid or distributed to you personally from your companies though. 

I'm sorry Rodney, but your information is incorrect. Solo 401k plan can be adopted by any legal business entity, including sole-proprietor, partnership, LLC, corporation, etc.

There are two ways you can contribute to the Solo 401k: employee elective deferrals (as an employee of your company or as self-employed) and profit sharing, which contributed by the business sponsoring the plan.

You can learn more on the IRS website here:

https://www.irs.gov/Retirement-Plans/One-Participa...

@Michael Hammond

As long as you are performing at minimum part-time self-employment activity (earned income) under one of the entity types that you are describing, and you don't have any full-time, W-2 employees, you may be a good candidate for a self-employed solo 401k plan. The following IRS website describes self-employment: 

https://www.irs.gov/Businesses/Small-Businesses-&-...

It is also important to note that you cannot use the properties that are purchased by the solo 401k  as your self-employment income because the properties are assets of the solo 401k. However, if you take a participant solo 401k loan you may invest those funds in your own business or in real estate that you can treat as your self-employed business provided you are actively managing and/or improving the properties.

Lastly, when making annual contributions to a solo 401k, the calculation must be based on aggregate self-employment earnings form all self-employment activity not just from one business; therefore, even if you have net-income from one business but a net loss from another, you may not have any net-income to make an  annual solo 401k contribution.