Solo 401k real estate purchase limitation question

BACKGROUND: We are wanting to start investing our self-directed solo 401k trust in rental properties.  Our major concern on the first one is the limitations around buying it within our 401k (we can't do any work on it, have our son mow, etc).  This might not be a big deal for us but it would be nice to have more flexibility while we're learning.

I saw online that we should be able to borrow the lesser of 50k or 50% of our 401k balance personally.  If this is true, we're thinking we could do that and then buy the property under an LLC.  

Our thought is that doing that would keep us from having any prohibited transactions with the 401k and would also allow us to pay interest on the loan back into our 401k to increase its balance.

QUESTION 1: Does this sound right to you or would you have any hesitation in doing it this way?

ANSWER:  You are correct that in order to physically do work on the properties, the properties would need to be purchased outside of the retirement account. Therefore, yes a solo 401k loan would be the solution since the borrowed funds would no longer fall under the solo 401k umbrella. To learn more about the solo 401k loan rules, click here.

QUESTION 2: Secondly, if we did buy another property 50% us and 50% 401k would we, at a later date, be able to buy out the 401k's ownership of it if we wanted to or would we be stuck at 50/50 until the time that we sold the property outright?

ANSWER: The transaction you are describing falls under the tenants-in-common category. Click here  and here to learn more about this type of solo 401k investment transaction. If you as the trustee of the plan partner with the solo 401k to invest in a rental property under a tenants-in-common transaction, you can never buy out the 401k plan’s ownership portion because you are a disqualified party. Other disqualified persons include your spouse, children and parents, to name a few. However, you could take the property out of the 401k as an in-kind distribution and pay the taxes on the solo 401k owned portion (the 50%). So, instead of taking a cash distribution form the solo 401k, you would take the distribution in the form of an asset (the real estate).  The deed would then be recorded to list you or the LLC as the full owner of the property.

I appreciate your incite, 

Donna L. in Seattle Washington

Move money from a 401k to a Roth Solo 401k

QUESTION: I understand I can move money from a normal 401k – including my self-directed one – into a Roth , pay taxes on the monies transferred now, then use that Roth for traditional investments. Is there a way to do the same but not be bound by common investing (stocks, brokerage houses, etc) within that Solo 401k Roth? The investment I have in mind is buying shares in a new company, but the shares are unregistered, non-traded, non-public company shares, which I plan to do with my Solo401k if I cannot find a way to do it within a Roth. (I have done this with my Solo401k in another company for restricted stock shares but that company is Exchange listed and their shares trade on the OTC, as my shares can after the vesting period expires – so a different situation.)

ANSWER: Yes just like Roth 401k funds can be invested in publicly traded companies, the Roth solo 401k may also be invested   in private company shares. The following procedure sheds light on investing in private shares.  The same procedure applies to investing a pretax solo 401k in private company shares.

http://www.mysolo401k.net/Self-Directed-401k-Self-Directed-Solo-401k-Private-Investment-LLC-Corporation-LP.html

Thanks,

Linda in Minnesota

Can I my self-directed solo 401k lend money to my corporation?

QUESTION: I want to use my 401(k) to loan money to a company. This company is owned 100% by another company of which I own 45%. I also am an officer in that company. Question: Can I do that?

ANSWER:  This would be a prohibited transaction because you are an officer of the company. See number 8 of following page.

http://www.mysolo401k.net/Solo-401k-disqualified-person.html

(8) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10% or more shareholder, or highly compensated employee (earning 10% or more of the yearly wages of an employer) of a person described in (3), (4), (5), or (7)

 Thanks, Fred in Maryland

More Useful Information can be found by visiting following links:

Solo 401k Do's & Don'ts

Purchasing Private Shares