QUESTION: I live in Boston, Massachusetts and would like to open self-directed Solo 401k with your company since it allows for investing in real estate. I currently participate in a Solo 401k for which Fidelity is the Solo 401k provider. However, I can only invest in mutual funds and stocks with my Fidelity Solo 401k, but would like to open solo 401k that would allow me to invest in real estate.
Specifically, I would like to open self-directed Solo 401k, transfer my Fidelity Solo 401k to it and then purchase my father’s house since he is now retired and plans to buy a condominium in Orlando, Florida to escape the cold Massachusetts winters. Can you please let me know how much it would cost to establish self-directed Solo 401k with your company and how quickly my Fidelity Solo 401k can be transferred to your self-directed Solo 401k, as I would like to process the real estate purchase before the end of the year.
ANSWER: While our Solo 401k affords the self-employed business owner option to invest Solo 401k in real estate such as family homes, fixer-uppers, foreign real estate, commercial real estate and more, the purchase of real estate by a Solo 401k plan whether in Boston, Massachusetts or any other state that is owned by a disqualified party such as your father would be considered a Solo 401k prohibited transaction. Reason being, the sell or transfer of property owned by a disqualified person such as your father to the Solo 401k is prohibited.
For your education, to know if you are engaging in a prohibited transaction, first identify all of the players involved in Solo 401k. First, there is your Solo 401k, which will fund the investment, and then there is your father who by definition is a disqualified person. Therefore, it takes three elements to create a prohibited transaction:
1) A plan (the Self-Directed Solo 401k);
2) A disqualified person (in this case your father); and
3) A transaction between 1 and 2 above.
Since the purchase of your father’s Boston, MA real estate by your self-directed solo 401k would be considered a prohibited transaction, one other solution may be to process a Solo 401k Loan. Under a Solo 401k loan you as the Solo 401k participant can borrow from your Solo 401k and can use the Solo 401 loan proceeds for any purpose including the down payment of real estate owned by your father. To learn more visit Solo 401k Loan facts.