Individual 401K - Buy/Sell Land - Conflicting Info

[Jim Froehlich]

I have an existing 401K that I am considering rolling into a solo-401K for single-member LLC side business I have. The brokerage it is with tells me that I am not allowed to invest directly into real estate or notes - however, third party providers of solo-401K set-ups are telling me that if I set up this with them, I will be given a free brokerage account (with this same company) with ability (via checkbook) to invest in real estate, notes, liens, stocks, etc. Which is correct? Also, if I use that to buy/sell land in less than year increments, my understanding is that since such transactions are treated as ordinary income, then it is earned income and can be placed back into the 401K. Sound right?

[George Blower]

@Jim Froehlich

The "free" Solo 401k plans offered by brokerage firms will not allow you to invest in alternative investments such as real estate, notes, etc. What you can invest in depends on what the plan documents allow - the plan documents of one plan provider don't allow for investing in real estate (i.e. the brokerage) vs the plan documents of the other Solo 401k plan provider do allow for such investments.

If you invest your Solo 401k funds in real estate all of the returns of such investment must flow back to the Solo 401k and will do so on a tax-deferred basis - this is not earned income which you would report on your personal taxes and then defer part to a 401k.

Please see the following additional considerations regarding setting up a Solo 401k to invest in real estate.

1. First, you must meet the eligibility requirements to set up a Solo 401k: (i) you are self-employed; and (ii) you do not have any full-time w-2 employees (i.e. working 1000 hours or more per year) working for your self-employed business or otherwise working for you. Given this understanding, you would be eligible to establish a self-directed Solo 401k which allows for investing in real estate.

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. All of the income and expenses will need to flow in and out of the retirement account.

4. If you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira...

5. You can't live on the property or otherwise use it for personal use.

6. You can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. You must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. You should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).