QUESTIONS: I am interested in opening a self-directed 401k with
some funds from a previous employer. My goal is to utilize some of the funds
for real estate investment. A question that I have at this time though is that
I would like to work through an LLC for investment purposes. Is it possible to
roll a 401k over to a new self directed 401k that is set up as an LLC? Or
instead would the self directed 401k need to buy shares in the LLC as a way to
contribute funds?
ANSWER: First, you have to be self-employed
to open a solo 401k. Here is what
the IRS has published regarding the self-employment requirement.
Generally, you are self-employed if
any of the following apply to you.
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business)
ANSWER CONTINUED: The solo 401k can either be
invested directly in real estate whereby title to the property is taken in the
name of the solo 401k or the solo 401k funds can be invested in an LLC and
title is then taken in the name of the LLC. It is important to note, however,
that the solo 401k may not invest in your own LLC directly (that is your own
business). If you want to invest retirement
funds in your own real estate business, then the ROBS 401k may be an option. To
learn more about the ROBS 401k click here. To learn more about the real estate
operating company requirements click here,
as these rules apply to the ROBS 401k.
MORE QUESTIONS: My second question is probably a no brainer but I would like to confirm this. Any profits that come out of real estate activities would need to go back into either the LLC or the 401k is that correct? Or is there a way to supplement my current income with income from investment activities?
MORE ANSWERS:
Correct that if the solo 401k is invested in real estate, whether
directly or indirectly using an LLC, the profits would need to flow back to the
solo 401k or the LLC, not your personal bank account.
However, if
a ROBS 401k arrangement is incorporated, you can take a fair salary because you
would be an employee of the business funded with 401k funds. To learn more about
drawing a fair salary, visit here.
