Process of Transferring Solo 401k Real Estate Assets to an IRA LLC

Summary: When transferring  solo 401k plan assets, whether cash, real-estate, promissory notes, tax liens and so forth, to an IRA LLC, the solo 401k assets first must be transferred to a self-directed IRA and tax reporting performed, both to report the transfer of the solo 401k to the IRA and to formally close the solo 401k plan.

Because real-estate is the number one asset (besides cash) transferred from a solo 401k plan to an  IRA LLC,  this blog posting mainly addresses the process of transferring real-estate assets from a solo 401k plan to an  IRA LLC.

The following steps apply when transferring Solo 401k real-estate assets to an IRA LLC:

First: The solo 401k owner/trustee must satisfy at lease one of the following distribution triggering events:

Triggering event 1:   Have reached age 59 ½; or

Triggering event 2:  is no longer self-employed

Second: After satisfying at least one of the above solo 401k transfer or distribution triggering events, the next step is to open a self-directed IRA with a custodian such as IRA Services Trust Company out of San Carlos, CA.

Third: After the self-directed IRA has been established, the third step is to have the current solo 401k provider prepare changes of ownership/transfer authorization forms as well as quit claim deeds to transfer each real-estate property from the solo 401k plan to the self-directed IRA. The solo 401k trustee subsequently submits these forms to the self-directed IRA custodian for processing.

Fourth: The IRA facilitator (for example MySolo401k.Net) will register the new IRA LLC with the applicable state, obtain an employer identification for the LLC, and draft the special purpose IRA LLC operating agreement containing the applicable IRA and alternative investment language.

Fifth: After completing steps 3 and 4 above (i.e., the self-directed IRA custodian has transferred the properties to the self-directed IRA, the IRA LLC has been registered and operating agreement has been drafted), the next step entails depositing/investing the real-estate properties from the self-directed IRA into the LLC IRA, which is accomplished by preparing investment assignments for each property as well as grant deeds. You attorney can assist you in preparing these documents and your solo 401k provider may also have some templates that you can use.

The end-result of transferring real-estate solo 401k assets to an IRA LLC

When solo 401k real-estate assets are transferred from a Solo 401k plan to an IRA LLC, the solo 401k is essentially on the path to being closed/terminated; as such, the following forms are issued and filed with the IRS:

  • A 1099-R is issued by the solo 401k provider to the IRS and the solo 401k trustee to report the transfer of assets to the self-directed IRA using a code letter “G” which communicates to the IRS that the solo 401k assets including the real-estate have been transferred to the self-directed IRA.
  • The solo 401k provider will subsequently issue a final Form 5500-EZ o the IRS to formally close the solo 401k plan. The 5500-EZ is typically filed with the IRS by July 31 following the year of  solo 401k plan termination.
  • The Self-Directed IRA custodian issues a 5498 to the IRS by May of the year following the receipt of the solo 401k transfer of assets to confirm with the IRS that the solo 401k assets were timely transferred.
  • The IRA account holder reports the transfer of the Solo 401k to the self-directed IRA on his or her personal tax return (Form 1040) by filling out lines 16a and 16b.

Compliance Note: As you can see no reporting applies when investing the real-estate assets from the self-directed IRA into the IRA LLC; reason being, the LLC is owned by IRA and the real-estate is not being distributed but, instead, deposited/invested in the LLC.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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