QUESTIONS: I think I remember reading that the self-directed solo 401k Trust can invest in a rental property, and my uncle has purchased a house to fix up and rent. So can I use funds from my plan to invest in that rental? (There is also a local property management company that offers this type of investment, in case I need to avoid any family conflict of interest.)
The rental would be owned and managed by an LLC, so should the Solo 401k polan be a member (share holder) in the LLC or is it better to do it as a loan to the LLC?
And how would the solo 401k Trust report the yearly interest earned?
ANSWERS: Yes a solo 401k can invest in real estate alongside the solo 401k owner’s uncle or aunt for that matter because uncles and aunts are not listed on the disqualified party list found under IRC 4975 or ERISA Sec. 406(a).
Further, yes a self-directed solo 401k trust can invest in an LLC either by purchasing LLC units (similar to purchasing corporation stock shares); alternatively, the solo 401k trust can loan funds to an LLC through a promissory note.
When a solo 401k trust invests in unit of an LLC, the returns flow back to the solo 401k trust bank account or the returns remain in the LLC and then reinvested.
On the other hand, when a solo 401k trust loans funds to an LLC (promissory note investment), the payments flow back to the solo 401k bank account.
Lastly, annual reporting applies once the solo 401k trust value exceeds $250K and Form 5500-EZ is used to report the total value.
Francie in Arizona