I currently have a self-directed IRA through Etrade. However, I want to use some of that to start investing in real estate. I know I can't do that directly with Etrade, but will need some special documents to set it up. My question is about real estate investment options using a solo 401k.

I'm starting an investment company with my best friend - either an S corp or LLC. We are both contributing money and will share costs/profits.

I understand the main restrictions on using a solo 401k and keeping the money trail very clear/clean. What I'm not clear about is if I can invest the cash from my solo  401k into the new company while she also invests cash, possibly from her solo 401k, into that same company. When the company starts drawing a profit, each solo 401k gets an equal share (proportional to the percent of cash invested) paid back into the account through the business the same way an investor would receive profits. 

Is this allowed if I'm the trustee of the solo 401k as well as owner/partner of the business in which it's investing?

@Christa S Rickard

You can do what you ask and it sounds like a Roll Over Business Startup (ROBS) but you need to understand the ramifications of what you are thinking about. @Dmitriy Fomichenko and @ brian Eastman may shed some light for you with more information. Probably better to do with a phone call. If they can't help you let me know and I will hook you up with some others. 

@Christa S Rickard

You could take a loan from your solo 401k. You can borrow 50% of your solo 401k funds not to exceed $50,000 and use those funds for any purpose. To learn more about the loan rules, see the following.  

https://www.biggerpockets.com/blogs/3441/25089-self-directed-solo-401k-loan-facts

This may or may not qualify for a ROBS 401k. See the following.

https://www.biggerpockets.com/blogs/3441/52232-starting-a-real-estate-investment-business-with-a-robs-401k

Thank you for the quick replies.  @Carl Fischer I hadn't heard of a ROBS before, so I'll need to do some research in to that.

@George Blower thank you for the link to ROBs. Again, I'll need to read/talk to someone, but the summary in that link sounds like what I want to do. The only difference I see at first is that the company needs to be a C corp as opposed to an S corp or LLC. I also hadn't realized that I could only withdraw up to $50k for investing. That was a bit of a bummer, to be honest.

Christa,

you have to remember that you or any business that you own are considered to be a "disqualified person" to your 401k. You must speak with a qualified professional to make sure that you don't enter into a "prohibited transaction". 

@Christa S Rickard

The $50,000 limit does not apply to the ROBS 401k.

@Christa S Rickard

A Solo 401(k) or self-directed IRA is a tool for diversification of your tax sheltered retirement savings. While such plans may invest in real estate, everything has to be done entirely at arm's length and exclusively for the benefit of the plan. You cannot operate a business using such a plan or be personally involved beyond really acting as a fund manager - making decisions and deploying the plan capital.

All capital in a Solo 401(k) could be placed into an arm's length investment such as a rental property, private mortgage note, etc.  While the Solo 401(k) does offer a participant loan provision, that is limited to the lesser of $50K or 50% of your plan value.  That is not a plan investment, but rather you borrowing from your plan to put capital in your pocket for some purpose.

The Rollover as Business Startup is an entirely different solution, designed to allow for the capitalization of a business in which you have direct involvement using existing retirement funds.  You have to be an owner/operator of the business, and the enterprise needs to be engaging in a true business providing a product or service - not passive investment holdings such as rental properties.  While there are no taxes or penalties for using the plan funds to become a shareholder of your corporation, the corporation will operate in the taxable realm.  So, it is a tradeoff between access and tax sheltering, to some degree.

I've just done some reading on ROBs and it doesn't look like that will work for the reasons most have mentioned, as well as I need to be a full-time employee in the company. That is the eventual goal, but it won't happen for about 2 years.

So, owning rental property with a solo 401k is fine and maybe that's what I do to start. Buy a rental property through the solo 401k, all costs/profits go in/out of the 401k. Once I have cash built up (outside of the 401k) and the new company is established, the company can then buy the rental property from the 401k, correct? Understood that the transaction needs to be at fair market value.

Thanks again for all of the help with this!

@Christa S Rickard

No, your solo 401k could not sell to you or a business that you own.

@Christa S Rickard

Because you are a disqualified person to your 401k, you (or any businesses you own) are not allowed to transact with your 401k plan. This would prevent the business from buying the property from the 401k, even if it was at fair market value.

@Brian Eastman and @Justin Windham , thanks. I was exploring possible options for this method. It sounds like currently I need to keep the solo 401k as purely personal retirement. I can buy and sell real estate with it, but not to myself or any entity in which I have ownership interest. 

Thanks to everyone who has responded. I greatly appreciate the help.

@Christa S Rickard

That is correct. Disqualified persons will also include certain family members such as lineal ascendants (think parents, grandparents), lineal descendants (children, grandchildren) and spouses of lineal descendants.

@Christa S Rickard

To learn more about the prohibited transaction rules, see the following. 

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions

https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs