Who is the best for a SOLO 401k and why? How can I use it?

6 Replies

Hi BP,

I want to roll my ira to SOLO 401k because it sounds better in most ways to compared to self directed IRA. Mainly for the control and sounds like less expensive. This IRA is about 65k

My 2 questions are:

1. Who should I use for a SOLO 401k and why? IE: Fees, ease of use, etc. Should I use the same credit union that holds my HELOC?

2. If I use part or all of my SOLO 401k to buy a rental property, can I take a profit from it or is it considered qualified money?  What about to do a flip?  Can I only use a loan and take income from it or is it truly in my control?

Thanks all!

Good morning @Jeremy Karja

if you're looking to invest in traditional equities/income investments, you can open a traditional solo 401(k) from brokerages like Fidelity or Schwab. If you're looking to invest in real estate, you want a self-administered plan, the equivalent of a self-directed IRA LLC setup. It's implemented as a trust, with you serving as trustee. You will have checkbook control.

You may not take any profits, personally.  All profits and gains return to the trust.   You can flip properties, if you engage in this activity regularly, your profits will be subject to UBIT (Unrelated Business Income Tax), because flipping is considered engaging in an active business and that is taxable.  UBIT is taxed at trust rates, which hits 39.6% quickly.  Having said that, it can still be very lucrative to pay the tax. 

As for loans go, your 401(k) can borrow.  However, it must be non-recourse funding and you MAY NOT personally guarantee the loan.

When selecting a company to provide you with a 401(k), you want to make sure you get good service, not just a cheap price.  Someone to make sure you don't step in it.  It's easy to do.  I used Safeguard to set mine up.  My contact there is Brian Eastman.  He's great and a frequent contributor on biggerpockets.  You might find a discount provider who is cheaper.  There are some other very knowledgeable providers on BP as well.

@Jeremy Karja

You are right, the Solo 401k will provide a lot of benefits over an IRA if you are eligible. You'll need self-employment activity and no full time non-owner employees to qualify.

1. A provider that specializes in Solo 401k plans that allow for alternative assets such as real estate will be able to get you squared away. As @Phil G. mentioned in his informative post, brokerages and traditional institutions typically setup plans that can only invest into securities. There are several providers who are active on these forums that you could contact to learn more about fees and services offered. *Full disclosure: my company is one of those providers, though I'd recommend you shop around and compare.*

2. Your Solo 401k would indeed be a qualified plan. The money inside and the investments made with those funds would be off limits to you until you take a distribution from the plan. The one exception is taking a loan from the Solo 401k, though that would be subject to certain loan limits and parameters. If you use a loan from the 401k (or a combination of the loan and other non-qualified money) to fund an investment such as a flip, then the investment is truly yours (not the Solo 401k's) and you can profit from and control that investment in any way you wish. This is because participant loan funds are your funds until you pay them back to the plan.

@Phil G. and @Justin Windham - Thank you very much for your thorough answers. I am in the financial industry but not in REI side of it so that all makes sense.

I guess my other question is: Is there a way or circumstances I can uses my Solo K or Self-directed for some sort personal income whether flipping or rental units today and not at 59 1/2?  Also, if I use cash for half and the Solo K for half and get X return whether rental or flip is it simply percentage based?  Meaning the 50% goes back to the Solo K and 50% back to cash, NQ?  The same for expenses, keep it at 50% of each for all costs/expenses or re-adjust the percentage?

I hope that makes sense.  Basically, looking for a way to take the cash now rather than later but still have my Q money working for me rather than me playing in the stock market and losing. 

Thanks again!

@Jeremy Karja

Because of the prohibited transaction rules, you cannot use your Solo 401k to create income for yourself without taking taxable distributions which may also come with early distribution penalties.

In some cases you might be able to partner with your plan, but again, because of the PT rules, it's not generally recommended. It will at the very least limit your flexibility with the investment and could be prohibited if you're "enabling" either party to gain access to an investment that would otherwise be unattainable. That said, if you were to co-invest with your plan, then the profits would go back to the respective owners/investors according to the investment ratio, yes. The same goes for any expenses and additional capital investments.

You might want to consider doing completely separate investments. Solo 401k investments build your retirement portfolio and grow tax-deferred or tax-free. Personal (or other non-retirement) investments allow you to take the income personally and possibly receive tax deductions against your income. The details of these issues are best saved for more in-depth conversations rather than these forums, but I hope that helps with some framework.

Originally posted by: @Jeremy Karja  

...my other question is: Is there a way or circumstances I can uses my Solo K or Self-directed for some sort personal income whether flipping or rental units today and not at 59 1/2?  

Jeremy, retirement accounts are designed for your future benefits, not for your current benefits. There is no way you can use any of the income or assets of the plan for your own personal benefits. As "disqualified person" you are prohibited from that. This rule is not specific to the self-directed Solo 401k plan, but it equally applies to all retirement accounts, regardless self-directed or not. If you take any distribution from you retirement account now (early distribution) - it will be subject to taxes and penalties, both on state and federal levels. 

Create Lasting Wealth Through Real Estate

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

Start here