New to Real Estate · Oklahoma, USA · Member since 2019 · 24 posts · 10 votes
I am new to the real estate game. I have only recently started saving money to begin investing into real estate. I am currently working at a w2 job and also putting money into the 401k offered at work. I recently purchased Tax Strategies for the Savvy Real Estate Investor and it mentioned a solo 401k as tax deferred option for investing in real estate. I started researching the solo 401k and the articles I have read kept mentioning "earned" income. I am looking to start my portfolio with buy and hold properties and the passive income does not allow me to open a solo 401k. Is that what I have read or am I misinterpreting it? Also if I am able to open one am I able to put income from my w2 job into it or is a self directed IRA my only option right now?
It does not sound as if a self-directed Solo 401(k) would fit your situation at the current time.
The Solo 401(k) is an employer sponsored retirement plan. This means there has to be a business that establishes the plan as a benefit for employees. Holding rental properties is a form of passive income, not business income. As such, your portfolio of rental homes would not be considered a business capable of sponsoring a Solo 401(k) plan, nor would it make sense to attempt to re-configure a rental business to accomplish this goal. Passive rental income is very tax-favorable as it is.
Your current employer 401(k) monies are likely trapped in that plan. Contribute, take advantage of the tax savings and potential employer match, and build yourself some tax-sheltered savings.
If you have existing retirement funds outside of your existing employer 401(k), those could be rolled over into a self-directed IRA. This would give you the potential to diversify that savings outside of the stock market and into alternative assets such as real estate. Keep in mind, however, that the IRA(or 401k if you ever get there) is investing in real estate on a standalone basis separate from you. These vehicles are not a means for you to obtain access to tax-sheltered funds, but rather a way to deploy the tax-sheltered funds differently.
It does not sound as if a self-directed Solo 401(k) would fit your situation at the current time.
The Solo 401(k) is an employer sponsored retirement plan. This means there has to be a business that establishes the plan as a benefit for employees. Holding rental properties is a form of passive income, not business income. As such, your portfolio of rental homes would not be considered a business capable of sponsoring a Solo 401(k) plan, nor would it make sense to attempt to re-configure a rental business to accomplish this goal. Passive rental income is very tax-favorable as it is.
Your current employer 401(k) monies are likely trapped in that plan. Contribute, take advantage of the tax savings and potential employer match, and build yourself some tax-sheltered savings.
If you have existing retirement funds outside of your existing employer 401(k), those could be rolled over into a self-directed IRA. This would give you the potential to diversify that savings outside of the stock market and into alternative assets such as real estate. Keep in mind, however, that the IRA(or 401k if you ever get there) is investing in real estate on a standalone basis separate from you. These vehicles are not a means for you to obtain access to tax-sheltered funds, but rather a way to deploy the tax-sheltered funds differently.
My current plans for me real estate investing career are not set in stone. Buy and hold has been my primary choice for education into the real estate industry. Alternative paths are an open concept and it sounds like devising my plan into a business that can allow me access to a Solo 401(k) may be a better path.
As I noted in my prior post, do not do that. Changing rental income to compensation income is possible. It is also possible to do a whole lot of other things that do not make sense. With very few exceptions on a large portfolio of properties, it simply does not make sense to turn passive income into self-employment income.
You have received good advice. Talk to your employer and see if the 401k plan has the capability to self direct or can it be amended to self direct? Don’t pay self employment taxes on passive income.