A self-directed solo 401k is a type of retirement plan for the self-employed that allows for investing in alternative investments such as real estate, notes, metals, tax liens and traditional investments like stocks and mutual funds. Visit here for a list of popular solo 401k investments.
While the above investment types including real estate may be placed directly through the solo 401k plan instead of a solo 401k owned LLC, this blog post covers the process of placing investments through a solo 401k owned LLC (i.e., single member solo 401k LLC).
NOTE: My Solo 401k Financial also specializes in setting up single member LLC’s where the solo 401k is the sole member.
First Step: Open a self-directed solo 401k plan
The first step is to open a self-directed solo 401k with a solo 401k provider whose solo 401k plan allows for investing in alternative investments such as as single member LLC.
Second Step: Fund the Self-Directed Solo 401k Plan
Once the solo 401k has been established, the next step is to open the solo 401k bank account and to fund it by either making an annual contribution or by transferring IRAs (except for Roth IRAs as the Roth IRA rules do not permit transfers to a solo 401k-clicke here to learn more about this restriction), and/or former employer plans to the solo 401k plan.
Third Step: Register the LLC with the Secretary of State
After the self-directed solo 401k has been funded, it is now time to register the LLC with the secretary of state. The Secretary of State will charge a fee to register the LLC and the fee varies by state.
Fourth Step: Draft the Special Purpose Solo 401k LLC Operating Agreement
After the above steps have been completed, the next step is to have the LLC operating agreement prepared. This is a vital step as the LLC operating agreement will need to outline both the solo 401k rules and IRS rules. For this reason, it is not recommended to use an off-the-shelf (e.g., a legal zoom) LLC operating agreement. For example, regulatory language surrounding the 401k prohibited transaction rules, disallowed investment rules, decedent account rules, QDRO rules, distribution rules, RMD rules, UBIT and UDFI rules will need to be included in the LLC operating agreement.
Fifth Step: Obtain an Employer Identification Number (EIN) For the LLC (do not use the solo 401k trust’s EIN)
To obtain employer identification number (EIN) for the LLC, use the following IRS site:
Sixth Step: Open the Bank Account for the LLC (this is a separate bank account from the solo 401k bank account)
This is a separate bank account from the solo 401k bank as this bank account is for the LLC. You choose where to open the LLC bank account and does not require the use of the same bank or credit union where you opened the bank account for the solo 401k. The bank or credit union representative will ask for the LLC articles of Organization and a copy of the LLC employer identification number letter.
Seventh Step: Fund the LLC Using Self-Directed Solo 401k Funds
After the LLC bank account has been opened, the next step is to fund with solo 401k funds. Funding the LLC bank account can be done by check or by wire, and the funds have to flow directly from the solo 4o1k bank account to the LLC bank account. If funding is done by check, the check will need to be made payable in the name of the LLC not your personal name.
Eight Step: Start Placing Investments Under the Solo 401k Funded LLC
After the LLC has been funded using solo 401k funds, future investments will be placed through the LLC bank account not the solo 401k bank account. Also, investments will be titled in the name of the LLC. If the LLC invests in real estate, for example, the funds for the purchased will flow from the LLC bank account to the seller, expenses and gains will also flow to the LLC bank account not the solo 401k bank account. However, once you are ready to dissolve the LLC or no longer wish to place investments via the solo 401k owned LLC, the funds will flow back to the solo 401k bank account. Also, solo 401k participant loans, and distributions such as required minimum distributions (RMDs) will need to be processed from the solo 401k bank account not the LLC bank account.