Solo 401(K) want to invest in Real Estate

11 Replies

Hi, I need to open a solo 401(k),  buy my concern is I want to invest in real estate, then do I need to go for Solo 401(k) with check control or I can do this without check control also.

also which brokerage help me for this purpose.

@Raj G.

First, to be eligible for a Solo 401k plan you must be self-employed or have a legitimate business with earned income and no full time employees (over 1,000 hours per year) except yourself and your spouse.

If you wish to invest in real estate then you need self-directed Solo 401k, brokerage or major financial institutions will not help. They tent to limit your investment choices to conventional investments such as stocks and mutual funds.

To set up a self-directed Solo 401k you need a specialty provider firm, there are several of us who actively participate on this forum and can help you. Do some some due diligence, search and read previous discussions, select few professionals and then speak with them, then narrow down to the one you wish to work with. The following discussion can be a good start for you:

https://www.biggerpockets.com/forums/51/topics/527...

@Raj G.

In order to invest a Solo 401k into real estate, the plan provider's documents must allow for alternative assets. Solo 401k plans setup with a brokerage are restricted to stocks, mutual funds, and other assets that the brokerage firm offers.

Providers of Solo 401k plans with checkbook control will better be able to help you. Many of our clients invest into real estate with the Solo 401k plans. As @Dmitriy Fomichenko mentioned, there are several providers who regularly post to these forums. I'd recommend reaching out to some to get a feel for how you might like to proceed.

@Raj G. 

If you use the checkbook control solo 401k feature, the solo 401k brokerage account can be opened at a brokerage firm like Fidelity, Schwab and TD Ameritrade. The real estate investment can also be placed by wire instead of by check trough one of these brokerage firms. This is possible because the solo 401k plan document provider is the one providing the solo 401k plan not the brokerage firm. The brokerage firm is simply holding the funds. 

@Dmitriy Fomichenko @Justin Windham @George Blower  

Is there any value in me starting a Solo 401(k) since I am older than 59 1/2 with plenty of cash flow from my properties? 

1) I buy properties in my LLC, fix them up, and sell them on Lease Option for cash flow.The property stays in my LLC for several years. (Long Term Cap Gains) Kind of like a rental with the renter being able to buy it eventually if they want.

2) I also buy properties in another LLC, fix them up and sell them turnkey to investors. (Short Term Cap Gains) which generates about $250k a year.

For #2 - Do I have to stop taking the properties into my LLC and instead Use Assignments to meet the requirement for a Solo 401(k)? (Wholesaling) I can switch to assigning if it makes a big difference.

Then, If I understand Solo 401(k)s correctly, I can take some of that money, fund a Solo 401(k) and do private lending from it. That part is fairly regularly written about, so I think that is correct.

But what I can't seem to grasp is why I would tie up funds in a Solo 401(k) after age 59 1/2 since it is all going to be taxed eventually anyway. Is there actually any tax savings or is it just deferred? 

I already have more than enough money coming in from #1) above (getting cash flow from the Lease Options). I am not needing more cash flow at some future time. But I will continue buying and selling turnkeys.

Is there an advantage to Solo 401(k)s that I am missing?

Account Closed

There is likely an advantage to having a Solo 401k if you have earned income that you are being taxed on. While pre-tax contributions to the plan are tax-deferred (you'll eventually be taxed on that money anyway) the benefit is still that you end up with more money in the long run. Keeping money that would otherwise go to the government in the account to compound can be a big advantage.

One question to look at with your tax advisor is how much earned income you are generating since your contributions will based on that number. You'll want to consider whether it makes sense to reevaluate what is currently earned income vs passive. Earned income will come with SE taxes, but contributions to the plan will defer income taxes.

Another consideration to make are the likely returns that you can get within the plan when compared to the returns you're getting currently investing outside the plan.

Account Closed

Firstly, I would question your point 2 activity as capital gains.  Profits from flipping at the volume you appear to be operating at would more likely be considered self-employment income subject to regular taxation plus self-employment taxes.

In that case, being able to shelter some of that income from taxation by contributing to a Solo 401(k) could be advantageous.  

Likewise, if you do not really need current income, you can do things like lending with the plan and let that grow tax deferred.  It probably does not really "save" on taxes in a tax-deferred structure, but would allow you through the benefits of tax-deferral to mushroom that income to a larger amount over time.  So, you will pay more taxes on more money, but also have more spendable after-tax funds in your overall savings.

Account Closed

Unless you have IRAs or former employer funds already that can be transferred to the solo 401k, I agree that it may not make much sense to open a solo 401k plan. 

However, if you are interested in accumulating tax free gains, then consider doing the following:

Setup your self-employed business as as a LLC taxed as an S-corp., generate at least $61,000 of W-2 wages through the LLC, contribute $24,500 of the $61,000 to the Roth solo 401k designated account, contribute the difference of $36,500 ($61,000 - $24,500) to the solo 401k voluntary after-tax account, and then process an in-plan solo 401k conversion of the $36,500 to the Roth solo 401k. The result will be $61,000 in Roth solo 401k fund that you can invest tax free in real estate or promissory notes, for example.

@Justin Windham @Brian Eastman I appreciate your responses.

Since my specialty is buying "Subject To", (taking over the financing) (yeah, I know, a little different than what most people do) I have to revert to thinking how the average transaction works using banks or cash along with the tax write offs. I think I need to play with the numbers to understand this better.

Originally posted by @George Blower :

@Mike S.

Unless you have IRAs or former employer funds already that can be transferred to the solo 401k, I agree that it may not make much sense to open a solo 401k plan. 

However, if you are interested in accumulating tax free gains, then consider doing the following:

Setup your self-employed business as as a LLC taxed as an S-corp., generate at least $61,000 of W-2 wages through the LLC, contribute $24,500 of the $61,000 to the Roth solo 401k designated account, contribute the difference of $36,500 ($61,000 - $24,500) to the solo 401k voluntary after-tax account, and then process an in-plan solo 401k conversion of the $36,500 to the Roth solo 401k. The result will be $61,000 in Roth solo 401k fund that you can invest tax free in real estate or promissory notes, for example.

@George Blower   This looks interesting. I'll play with the numbers you provide. Thank you.