Basic Outline: Order of Self Directed 401k Real Estate purchase process
After opening the Self-Directed 401k and funding the bank account:
- Put offer/contract together listing the Solo 401k account’s name (see below)
- Fund earnest deposit by writing check from the solo 401k bank account
- Submit all documents to your real estate professional(s)
Before looking for real-estate property
If you haven’t already opened and funded the Solo 401k, make sure to first do that. You need to open a self-directed 401k so that you have the Solo 401k plan “name” which will be listed on all the real estate forms. Keep in mind that the self-employed 401k will be purchasing the property, and to comply with the regulations, fees associated with the real estate purchase must be paid with Solo 401k funds.
Establish the Solo 401k Account
Once the Solo 401k plan documents have been drafted, the Solo 401k documents listing the Solo 401k “name” will be sent to you for opening the self-directed solo 401k bank account.
Fund the Solo 401k bank account
Once we receive the required information for drafting the Solo 401k trust documents, we also need to know how the Solo 401k plan will be funded. The speed of funding a self-employed 401k account depends on how it is funded. Funding methods include new deductible contribution, IRA rollover, transfer from another qualified plan including a Solo 401k/Individual 401k or former employer 401k, 403b, Defined Benefit Plan, 457b or Thrift Savings Plan.
Determine property purchasing method
After the solo 401k bank account is established, proceed with making Self Directed 401k real estate purchase. As trustee of the solo 401k, determine one of the following purchasing methods:
Choose purchasing method
Solo 401k purchases 100% of property with all cash no loan;
Solo 401k enters into a tenants-in-common (TIC) transaction using all cash only; or
Solo 401k purchases 100% of real property using leverage (Solo 401k non-recourse loan)
Put offer together / contract
When putting offer together, make sure to list the Solo 401k as the buyer. Remember that the Solo 401k is a separate investor/entity from you. Therefore, the solo 401k name must be listed on all purchasing documents (see below for more on this). If purchasing under tenants-in-common, make sure to reflect the Solo 401k plan’s purchase portion separately. The Solo 401k plan’s title should read as follows, for example:
Jane Do, Trustee of ABC Solo 401k Trust
IMPORTANT: The regulations prohibit the assignment of a contract first drawn up solely in the name of the Solo 401k trustee’s name to the Solo 401k account.
Make a deposit / earnest deposit
When the solo 401k purchases property, the Solo 401k is required to fund any necessary deposit or earnest funds.
At closing, you, as trustee of the Solo 401k, will approve and sign all documents and then submit them to the closing agent along with a check from the solo 401k bank account for the purchase.
Vesting of all documents
- Jane Doe, Trustee of ABC Solo 401k Trust
Also, the the real estate agent/title company will ask for the 7 page Trust Agreement for the solo 401k. The Trust Agreement lists the name of the trustee(s).
All ongoing expenses in connection with the solo 401k real estate investment must be paid from the Solo 401k checking account. Never pay expenses with personal funds (non-Solo 401k funds) as the solo 401k prohibited transactions disallow it. For this reason, it’s important that the self-directed solo 401k maintains enough liquid cash in order to cover expenses such as HOA dues, property tax, etc.
Click here to learn more about the various solo 401k real estate investment methods.
Click here to read our blog about investing in real estate with your Solo 401k.
This information is for informational purposes. For information specific to your investment situation, My Solo 401k Financial recommends consulting with a qualified tax adviser, CPA, financial planner or investment manager. My Solo 401k Financial is 401k provider; therefore, it does not offer investment or tax advice, nor sell investments.