solo 401k or self directed ira?

Question

Hi Everyone,

I've been reading the forums and discussions on BP regarding Solo 401k vs SDIRA's.    I left my job last year, and have started a real estate investment company (LLC) and am getting ready to invest in rental properties.  My question is that I have a 401k with my old job, and am wanting to convert it to a vehicle that will benefit me most and I can use it to invest  in rental properties.  Any advice on this would be appreciated.. From what I can tell, the Solo 401K would be best.  my 401k is currently with Fidelity, so I'm guessing I will need to completely remove it from Fidelity, as they don't allow real estate investing... Thanks all for your help.

Eva Mackowski · Answer

Thank you for the info!  A little additional info on my company.  I am going to start off doing wholesaling.  would that count as sufficient income to open a solo 401k?,, and if so once i start getting income, does the income flow thru the solo 401k account, or does it go through the llc?  I'm a bit confused on how this works.

Justin Windham · Answer

@Eva Mackowski

Any self-employment activity that generates earned income is typically sufficient for adopting a Solo 401k plan as long as you will not have any full-time employees besides the business owners. Because of the prohibited transaction rules, you won't run your business activity through the Solo 401k. I'd recommend calling a few Solo 401k providers who post regularly to BP. This will give you a better understanding of the various offerings and your options.

George Blower · Answer

@Eva Mackowski

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities:

• Both were created by congress for individuals to save for retirement;
• Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
• Both allow for Roth contributions;
• Both are subject to prohibited transaction rules;
• Both are subject to federal taxes at time of distribution;
• Both allow for checkbook control for placing alternative investments;
• Both may be invested in annuities;
• Both are protected from creditors;
• Both allow for nondeductible contributions; and
• Both are prohibited from investing in assets listed under I.R.C. 408(m)

The Self-Directed IRA and Solo 401k Differences:

• In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
• To open a self-directed IRA, self-employment income is not required;
• In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
• The solo 401k allows for checkbook control from the onset;
• The solo 401k allows for personal loan known as a solo 401k loan;
• It is prohibited to borrow from your IRA;
• The Solo 401k may be invested in life insurance;
• The self-directed IRA may not be invested in life insurance;
• The solo 401k allow for high contribution amounts (for 2018, the solo 401k contribution limit is $55,000, whereas the self-directed IRA contribution limit is $5,500);
• The solo 401k business owner can serve as trustee of the solo 401k;
• The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
• When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
• Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
• When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
• Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
• Pre-tax IRA contributions on reported on line 32 of Form 1040;
• Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
• Roth solo 401k funds are subject to RMDs;
• A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
• Roth IRA funds are not subject to requirement minimum distributions (RMDs);
• The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
• The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
• At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
• At termination, the self-directed IRA is only required to file a form 1099-R.

Dmitriy Fomichenko · Answer

@Eva Mackowski

Welcome to BP and congrats on your first forum post!

Truly self-directed Solo 401k has several advantages over SDIRA, however it is not for everyone. To qualify you must be self-employed or own a legitimate business with earned income (LLC with rental properties only produce passive rental income and would not be sufficient).

But regardless which route you are going to go: you are correct, you must move your IRA from Fidelity because they do not allow alternative investments.