Solo 401K and Real Estate

7 Replies

I have funds sitting in my company sponsored 401K plan; however, I would like to transfer the funds over to a Solo 401K to invest in RE. From watching Youtube, one of the requirements of opening a Solo 401K is that you must be self-employed or have a company. If I have properties, but they are not in an LLC, does that still qualify as a company or self-employment? Sorry, if this does not make any sense. I'm just trying to find a better way to utilize the money that I have sitting in my 401K while still maintaining a tax shelter.

Thank You.

David

@David Huynh , rental real estate (passive activity) wouldn't count. You need earned income, e.g., income you'd put on Schedule C. You don't necessarily need an LLC -- just earned income from your own business.

Also, your business has to be legit, ongoing, etc.  You can't set it up just for purposes of qualifying for a Solo 401(k).

Also, if you contribute to your day job's 401(k), you can still contribute to your Solo 401(k), but the total contribution limit ($18,500 for 2018) is the max for both plans combined, not separately, meaning that it's not $18,500 for your day job's 401(k) and $18,500 for your Solo 401(k) but rather a grand total of $18,500 for both.

@Dmitriy Fomichenko could elaborate.

@David Huynh   It sounds like you are referring to funds in your current employer 401(k) plan.  In all likelihood, you cannot move those until you change jobs, or if you are still with this employer beyond 59 1/2 years of age.

While a Solo 401(k) may not be an option, if you do have current retirement savings outside of your current employer plan, you could look into a self-directed IRA for broader investment choices.

David,

As Logan explained you in order to qualify for the Solo 401k plan you must have legitimate business with earned income. Rental properties are considered investments not a business.

If you don't have legitimate funds to rollover you will not benefit from self-directed IRA either, the limit for new contributions is only $5,500/yr.

@David Huynh

What tax return do you file to report income from your properties?

If you were to convert some of the rentals to Airbnb, that income is usually considered "hotel" income not "rental" income. The income would then be eligible to fund 401k/IRA contributions.

@David Huynh

You do need earned income from self-employment to be eligible for a Solo 401k. Rentals income is considered passive by default. You and/or your accountant might determine that you do have some earned income based on your active management, rehab or repair, or method of renting the properties. You might also be eligible based on consulting or freelance work you do. If not, a self-directed IRA might be your best option.

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