I have recently formed an LLC with a business partner to flip properties. I have a couple 401k’s from past employment with nice balances that I would like to tap in to use as funding for our projects. The LLC is a 50/50 where we intend to contribute equally to initial investment (property acquisition) and for rehab costs. As I understand it, I need to first convert it to an i401k. Once that is done, how much of the balance can I use and how do I go about setting this up. Keep in mind that the LLC is a 50/50 between me and my biz partner. Also - does all of the profit from the flip have to go back in to the i401k or can some of the profit be appropriately taxed held outside the i401k?
You can use 100% of the money once you convert to a solo 401k however there are prohibited transactions.
Investing in an existing LLC you own might be one of them. I think you need to research some more,
All profits need to go back to the 401k. You can’t make a penny on the investments. (Your 401k can buy those gains are untouchable until your retire) The investments with others like your biz partner are allowed but the investment purchase and rehab has to be equally funded by 401k and the partner. Doesn’t mean it has to be a 50 to split but the % has to be the same. If the 401k invests %60 for the purchase then the same applies to rehab investment. You partner has to do the same.
You may also have to pay Unrelated Business income Tax on any profit the 401k realizes. There are structures that can be set up to accomplish your goals. Look up ROBS roll over business startups, checkbook IRAs , etc. your age, income, employees, time spent in flip business will effect your options and outcome. Check with a tax attorney familiar with 401ks and IRAs to help form a plan.
hopefully you are aware that you are considered to be a "disqualified person" to your 401k, therefore you must make sure not to violate the IRS rules which prohibit you from providing any services to your retirement accounts and you are not allowed to receive personal benefits from the investments your 401k makes.
Be sure to speak with a qualified professional who can give you required guidance.
Note that you cannot invest your solo 401k funds in your own business unless you do it indirectly whereby you process a solo 401k participant loan. The rules allow the solo 401k participant to borrow 50% of his or her account balance not to exceed $50,000. Therefore, if you want to borrow the full $50,000, your solo 41k balance will need to be at least $100,000.
What is more, in order to open a solo 401k earned income activity from self-employment is required. To learn more about the self-employment rules, see the following.
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