Self-Directed 401k | part-time income | rental real estate

I am interested in the self-directed 401k but I have some concerns and questions.

QUESTION 1: First, on some of the blogs people state that on SD401k's "the rules are always changing and you have to be careful". Your thoughts?

ANSWER: This is a loaded question. I could write a book on this question alone.  Yes the 401k rules are changing but not with respect to allowable investment types. Since their inception all 401k plans including those for the self-employed have been permitted to invest in real estate, for example. The rules that have changed are the contribution rules, and the ROTH designated account rules, to name a few, but not with respect to alternative investments.

 BACKGROUND: Second, my intention is to establish a SD401k for the sole purpose of purchasing an investment property in Santa Rosa, CA. I would envision 

    A) contribute $400,000 to the SD401k with funding to come from rolling over my existing 401k plus some IRA's

    B) use the SD401k to purchase a house for cash and collect rental income into the SD401k. This income would be invested in securities. 

   C) at some point in the future, sell the house and invest the proceeds in securities.

   D) at that time I will be retired and I will begin to withdraw funds from the SD401k

QUESTION 2:  I have no intention to make further contributions to this 401k other than the initial funding from the rollover. Under this scenario, do I still need to show income from self-employment?

ANSWER: Of course you would have to have self-employment income or else the IRS may deem your self-employed business as a hobby business. Simply put, I do not recommend opening a self-directed 401k solely for the intention of consolidating to your retirement funds and not making solo 401k contributions as it would be a recipe for an audit by the IRS.

QUESTION 3:  if yes, is there a minimum income?

ANSWER: The IRS is broad on this and has simply published in IRS Pub 560 that part-time self-employment qualifies.

QUESTION 4:   what happens if I fail to generate any income? Are there penalties from the IRS?

ANSWER: In the event of an audit, the IRS could deem that your self-employed business is really just a hobby and challenge whether or not you qualified to even open the solo 401k.

QUESTION 5:   can the rental income and proceeds from the house sale be invested in securities until such time as they are withdrawn from the SD401k?

ANSWER: Yes the self-directed 401k rules permit investments in securities.

In sum, you may be better off opening a Self-Directed IRA LLC, which we also offer, since you are not required to be seal-employed to open one. 

Cory in CA