Restate Vanguard Solo 401k to Self-Directed Solo 401k

I am interested in purchasing a 10-acre piece of raw land in Montana but don't want to borrow or to tap my investment accounts because that would trigger tax bills.

QUESTION 1: I have a solo 401(k) at Vanguard with enough assets for this purchase. Can I transfer that to a solo 401(k) with you to buy this plot?

ANSWER: Yes you can transfer your current Vanguard Solo 401k to a self-directed solo 401k for investing in alternative investments such as raw land provided you are still self-employed and have no full-time employees.

QUESTION 2: How is that done? What are the fees?

ANSWER: To invest the existing Vanguard solo 401k plan in vacant land or other alternative investments such as precious metals, notes, tax liens, and private company shares, the existing Vanguard solo 401k plan will need to be restated to a self-directed solo 401k with a solo 401k plan document sponsor such as our company whose solo 401k plan document allows for alternative investments.  

Here is how the Vanguard Solo 401k restatement process works:

Because you already have solo 401k, we just need to restate the plan, so a final Form 5500-EZ will not apply. Instead, you are simply changing solo 401k plan providers. To restate the solo 401k, we need the original effective date of the Vanguard solo 401k plan, which is listed on the initial Vanguard solo 401k opening documents. We also need to know the name of the solo 401k plan. Lastly, you would need to complete the rest of the steps listed on our solo 401k sign-up page or give us a call and we can walk you through the process.  Lastly, visit solo 401k pricing to learn about the solo 401k fees.

QUESTION 3: Also, would there be restrictions on my use of the land? Could I build a home or cabin and use it myself?

ANSWER: While a self-directed solo 401k may invest in land that is subsequently developed, you could not use the land or the developed property for your personal use as it would be a violation of the prohibited transaction rules—specifically the following rule:

Furnishing of goods, services, or facilities between a Solo 401k plan and disqualified person. Click here for a full list of the solo 401k prohibited transaction rules.

Reason being, you are a disqualified party because you are the solo 401k owner and, therefore, may not personally benefit from any of your solo 401k assets including land that is developed.  

Thanks in advance, Larry in Montana

Rehab of solo 401k property by sibling (brother)

QUESTION: Once I buy a property with my solo 401k trust, can I hire my brother as general contractor to do the rehab on the property? I will still be the property manager, he would be the one doing the actual work on the property. I will pay him from the trust.

ANSWER: While a sibling is not technically a disqualified party under IRC 4975—the code section dealing with solo 401k prohibited transactions—if  the solo 401k owner’s brother is the general contractor for the solo 401k owned real estate property, it is important not to overpay the brother. In other words, the brother must receive a similar payment for his services as any other person performing the same service would charge. Lastly, yes rehab payments are required to be paid with solo 401k funds since the property is owned by the solo 401k. 

Thank you,

Josh in South Carolina

Solo 401k non-recourse loan for renovation expenses

QUESTION: If  we have to make renovations to properties owned by the solo 401k, can I write out a check straight to them from the 401K Trust.  Can I get a non-recourse loan to help with the renovations?

ANSWER: Correct that real property renovation expenses must be paid with funds from the solo 401k because it is a solo 401k owned asset. No you can not get a non-recourse loan to cover real-estate-renovation expenses. Reason being, a non-recourse loan is employed for the purchase of a property not for covering renovation expenses.

Gary in New Mexico

Can Solo 401k purchase investment property from myself?

QUESTION: If I currently have investment properties, can I set up a solo 401k, then purchase my investment properties from myself?

ANSWER: No because you as the solo 401k owner fall under the disqualified person category. Reason being, the regulations strictly prohibit the shifting, sale or exchange of a personal asset including real estate to a solo 401k or vice versa. Following is the specific section of IRC 4975, the section of the code that covers prohibited transactions, covering this specific scenario.

IRC Specific Code Section

“The sale, exchange, or lease of property between the plan (e.g., solo 401k plan)  and a disqualified person.”

Regards, 

Tricia in North Carolina