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.
Invest pretax and Roth Solo 401k Funds QUESTION:
Can I pool my pretax and roth solo 4o1k funds in the same LLC?
Flow of Expenses and Gains QUESTION:
All is going well with the new LLC and after purchasing three properties under the solo 401k owned LLC, we are poised to start collecting rental income. Question; besides any escrow money, should the collected income flow from the LLC account back into the solo 401k trust and into a separate account for pre-tax income?
Credit Card QUESTION:
When I opened the Business Checking Acct for the LLC, the bank offered a credit card. Is that okay?
Construction Loan QUESTION:
I’m working with the bank to finance construction of a new loan of an investment property owned by my LLC that is 100% owned by my solo 401K. They are requesting that I personally guarantee the loan. I don’t think it’s possible, but I’m asking you since it’s actually in the name of an LLC – would I be able to personally guarantee it? That would be my preferred route – to do the personal guarantee.
Good question. No you cannot personally guarantee the loan to the solo 401k owned LLC because your solo 401k plan is the member of the LLC.
Multi Member LLC QUESTION:
I’m investing in some real estate with a friend. Is there an advantage to having funds/control flow thru a special purpose LLC v.s. direct from the 401k plan?
The advantage is that both of your respective funds (your solo 401k and the other investor) would be pooled in one LLC, so the investment would be made in the name of the LLC. Therefore, all the expenses and income would flow through the one LLC bank account. You would also gain that additional layer of LLC protection from creditors which can also be obtained outside the LLC by getting property insurance.
The disadvantage is the LLC would be deemed a multi member LLC so it would be subject to being taxed as a partnership, resulting in having to file an annual Form 1065: U.S. Return of Partnership Income. A Schedule K-1: Partner’s share of Income, Deductions, Credits, etc. would also need to filed for each partner so for the solo 401k as well. So while the solo 401k would not be subject to paying taxes on the partner’s share of income until it is actually distributed from the solo 401k, it does add that extra partnership tax reporting requirement.
Use Existing LLC QUESTION:
Can we use an LLC that I set up and never used, just modify the language?
Assets Protected in the LLC QUESTION:
Are the assets just as protected in the LLC as they are in the Solo 401k? Say someone tripped on a sidewalk and tried to take it?
Invest Both Pretax Solo 401k and Roth Solo 401k Funds QUESTION:
Annual Tax Return for Solo 401k Owned LLC QUESTION:
LLC Protection QUESTION:
Holding real estate in an LLC which is owned by your solo 401(k) can offer limited liability protection with regards to other solo 401(k) assets which are not held in the name of the LLC (e.g. solo 401(k) brokerage account that holds equities, etc.).
Investing Both Pretax and Roth Funds QUESTION:
- You can invest both pre-tax and Roth funds in the LLC bank account.
- There will still just be one owner of the LLC (i.e. the solo 401k plan) but the ownership will be help in both your pre-tax and Roth sub-accounts.
- The ownership percentages will be based on the ratio of pre-tax solo 401k and Roth solo 401k funds invested in the LLC and you will need to ensure that you keep good records in order to ensure and document that returns on the investment are allocated between the pre-tax and Roth sub-accounts based on the ownership percentages.