All Forum Posts by: George Blower

@Victor Robinson

If you are self-employed with no full-time w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.

Solo 401k vs. Self-directed IRA

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

• Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
• Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

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. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and 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... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, 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. In either case, 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. In either case, 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).

@David Carroll

If you are self-employed with no full-time employees, your S-corp can sponsor a Solo 401k. Choose a self-directed Solo 401k provider which allows you to open the account for your Solo 401k at the bank or brokerage of your choice where you will have direct checkbook control.

While what is best will depend on your objective, here are some considerations:

• If you want access to bank checks, a debit card and/or the ability to ACH funds out, you will need a bank, credit union etc. rather than a brokerage.
• There are 100s of banks and credit unions that have opened accounts for a Solo 401k.
• Keep in mind that the bank's role is limited to simply providing the account (i.e. no tax reporting, no recordkeeping, etc.) such you may wish to de-prioritize familiarity with Solo 401k plans and focus on other things that are important to you (i.e. branch locations, fees, etc.).
• If you want the ability to invest in stocks, mutual funds, etc., you will need a brokerage account.
• Many brokerage firms will open "free" accounts (i.e. no setup fee, no maintenance fee), which will also come with checkbook access and the ability to wire funds out such that they function as a "hybrid" between a bank and/or brokerage account.

What is generally more important than the bank or brokerage provider is the Solo 401k plan provider. Here are some comments/considerations when choosing a Solo 401k provider:

1. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews with verified "true" customer reviews, etc.).

2. You may wish to confirm that the new 401k provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

3. You may wish to confirm that the new 401k provider will handle the ongoing compliance support such as any required 5500 filing (e.g. 5500-ez for a one-participant plan with assets in excess of $250,000), any required tax reporting (e.g. 1099-r in the event of a distribution or in-plan Roth conversion), mandatory plan updates and amendments, etc.

4. If you might take a 401k loan, you may wish to confirm that the new 401k provider will prepare the required 401k participant loan documents.

@Ricky R.

First, you must be eligible to set up a Solo 401k. In order to be eligible, you must be self-employed (e.g. providing goods and/or services through your personal effort), reporting self-employment activity on your taxes (e.g. Schedule C if you a sole proprietor) & 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.

The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence). There are no prepayment penalties and no restrictions on what you can do with the proceeds of the Solo 401k loan. This means that the typical Solo 401k real estate rules (i.e. purchasing property from an unrelated person, living in the property, working on the property, etc.) do not apply.

Here is more information regarding Solo 401k loans:

https://www.biggerpockets.com/blogs/9552/65453-pay...

https://www.biggerpockets.com/blogs/9552/64392-mul...

Self-directed IRA such as an IRA LLC with checkbook control

@Jordan Edge

If you are self-employed with no full-time w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.

Solo 401k vs. Self-directed IRA

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

• Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
• Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

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. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and 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... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, 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. In either case, 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. In either case, 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).

@Jack Battiste

1) Here is a link to the page of Fidelity's website that describes the type of account that would be setup for the Solo 401k: 

https://www.fidelity.com/retirement-ira/small-business/investment-only-plans

2) Keep in mind that you can't transfer funds from your Roth IRA to the Solo 401k because of the Roth IRA rules.

@Dustin S.

Assuming you can have a Solo 401k (self-employed with no full-time employees), here is a framework of determining whether you can contribute this income to a Solo 401k:

1) The threshold issue is whether this income is earned self-employment income (e.g. reported on Schedule C in the case of single-member LLC that is taxed as a disregarded entity). You will need to verify this with your tax advisor.

2) If yes, you can contribute to a Solo 401k (subject to contribution rules and limits). Please note that if your goal is Roth contributions, you can contribute as much as $56K (or even $62k if you are 50 or older) if you have a Solo 401k plan which supports Mega Backdoor Roth contributions.

@AJ Shepard

If you have any business with full time w2 employees, you cannot set up a Solo 401k

@Gebson Pinheiro

Given the obligation to report alternative investments held in IRA accounts (https://www.irs.gov/retirement-plans/asset-information-reporting-codes-for-form-5498) and the title records for real estate investments, detecting this transaction would be easy.

@Gebson Pinheiro

The compliance risk is clear - what you describe is a prohibited “step” transaction. The intervening “step” of selling to your adult stepchild would be ignored and the transaction would be analyzed as a transaction between you and your retirement account. Since no exception to the prohibited transaction rules allow the transaction it is prohibited.

I suppose it comes down to the following question: How lucky do you feel?