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?
ANSWER:
This confirms that you can invest both pretax and Roth solo 401k money in a single LLC.
There would only be one member of the LLC because there is only one solo 401k trust. When pooling solo 401k funds, there is no second trust as there is only one trust with pretax and Roth money in different sub-accounts.
As funds are returned from the LLC to the solo 401(k), they need to be allocated between the pretax and Roth sub-accounts based on the percentage of funds that were initially invested. For example, if 60% of the original investment came from pretax funds and 40% came from Roth funds then 60% of the funds returned will go into the pretax sub-account while 40% will be deposited into the Roth sub-account.
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?
ANSWER:
All investments and flow of expenses and income in connection with the LLC investments will flow through the LLC bank account.
The purpose of the LLC that was setup for the solo 401k plan (the solo 401k owned LLC) is to place investments under the LLC. Therefore, funds do not need to be returned to the solo 401k bank accounts (both the pretax and Roth designated bank accounts) until you are ready to start taking distributions from the solo 401k plan assuming you meet a distribution triggering event.
Credit Card QUESTION:
When I opened the Business Checking Acct for the LLC, the bank offered a credit card. Is that okay?
ANSWER:
No as the LLC is not allowed to get a credit card since the solo 401k is the member of the LLC. That would be prohibited.
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.
ANSWER:
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.
Also, loans to an an LLC where the solo 401k plan is the sole member have to be non-recourse and the funds have to be used toward the purchase of the house not to build a property on land already owned by the solo 401k owned 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?
ANSWER:
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?
ANSWER:
Yes if never used and never any member.
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?
ANSWER:
While a Solo 401k is a separate entity such that one can make a reasonable argument that any legal liability should be limited to the Solo 401k, one of the primary features of an LLC is the legal liability limitation (it’s in the name) and this feature is widely recognized and accepted.
Advantageous QUESTION:
People say it is but people say a lot of things-do you think it's advantageous to run things through the LLC vs the current way?
Based on customer feedback, most customers don’t have a separate LLC. For those that do, they are typically trying to protect other assets in their solo 401k (e.g. half the funds are invested in a real estate property and the other half are in a brokerage account).
Invest Both Pretax Solo 401k and Roth Solo 401k Funds QUESTION:
Can I invest my existing solo 401k which holds both Roth and pretax funds in the same solo 401k LLC?
Yes you can invest both pretax and Roth solo 401k money in a single LLC. There would only be one member of the LLC because there is only one solo 401k with pretax and Roth money in different sub-accounts. As funds are returned from the LLC to the solo 401(k), they need to be allocated between the pretax and Roth sub-accounts based on the percentage of funds that were initially invested. For example, if 60% of the original investment came from pretax funds and 40% came from Roth funds then 60% of the funds returned will go into the pretax sub-account while 40% will be deposited into the Roth sub-account.
Annual Tax Return for Solo 401k Owned LLC QUESTION:
Should a tax return be filed for my solo 401k funded LLC?
The IRS considers an LLC that is owned by a single Solo 401k (i.e. a single member LLC) to be a disregarded entity & no federal tax return is required. You likely need to file an annual report for the LLC at the state level.
LLC Protection QUESTION:
Can the Solo 401k LLC also protect my other solo 401k assets?
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:
Can I invest both roth solo 401k and pretax solo 401k funds in the same LLC?
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.
Own and Operate a Business QUESTION:
I currently run a software business as a sole-proprietor and receive payment for my services on a 1099 from my customers. My question is if it's possible to form an LLC, where my solo401k owns 100% of the newly formed LLC. Can I set this up so that the Roth sub account owns the LLC, and then I am an employee of the LLC - potentially having other employees in the future? When the LLC bills the customers all revenue flows into the LLC's account, not mine personally as I currently do as a sole proprietor. This would have the effect of all earnings/growth happening inside the Roth account, and not my personal account, thus not generating a tax bill.This seems to be too good to be true. Does the IRS have any guidance on such a setup? Do you have other clients operating similarly? I've seen your blog post on setting up a single member LLC inside the solo401k to hold real estate, which seems similar. Is running a service business from within the solo401k/LLC the same? In the blog post example I would not have a need to move money from the solo401k to the LLC to make any investments, as the money would instead be flowing in the other direction (ie customer payments coming in, with no capital investment required). However, I would need to be able to pay business expenses from the LLC (server hosting, internet service provider, etc) and so would need a credit card - yet the blog post indicates that it's the LLC is not allowed to have a credit card. Is it possible to handle this somehow?
In short: no – you can’t own and operate a business via your solo 401k. The LLC is used a vehicle to make investments (e.g. to limit liability within the plan – e.g. own separate real estate properties through different LLCs owned by the Solo 401k).
Sell or Deposit Property to LLC QUESTION:
I own a rental property. Can I deposit the existing property to my solo 401k funded LLC?
You can’t transfer, sell or exchange property that you own personally or through your own business to the Solo 401k or a single member LLC owned by your Solo 401k, as doing so would run afoul with the solo 401k prohibited transactions outlined here.
Setup a Separate LLC for Each Real Estate Investment QUESTION:
Should I form an LLC for each solo 401k real estate investment?
The school of thought is that from a liability protection perspective holding each property investment in its own LLC will separate each real estate deal. As a result, the other properties won’t be affected if one of the properties runs into a liability claim. However, most investors will simply purchase a general liability policy on all of the properties and still receive the same level of protection.
Two Participants Solo 401k LLC QUESTION:
My husband and I have one solo 401k plan but we are each separate beneficiaries and have separate accounts at Schwab (trustees of our own accounts). We want to set up an LLC for the solo 401k. Can we set up 1 LLC for the solo 401k with each of us as members
You would be able to invest your respective funds in the solo 401k plan in the same LLC. The solo 401k would be the sole member of the LLC since you are both participating in the same solo 401k plan. When both participants/trustee pool their funds from the same solo 401k which is sponsored by their same self-employed business, there is no second solo 401k.
Solo Funding of Self-Employed LLC Business QUESTION:
We want to know more about the process of funding the LLC we used to set up the Solo 401k for a real-estate purchase. Previously, the LLC operated some ecommerce transactions and my wife and I are the only members of the LLC -- I wanted to know what would be the process to fund the LLC with the Solo 401k and then purchase real estate through the LLC?
The solo 401(k) rules do not allow for investing the solo 401k in your own self-employed LLC business. Such a transaction is prohibited.
Note that the solo 401(k) plan can be invested directly in real estate where the solo 401(k) takes title to the property.
However, If you would like to invest a solo 401(k) in an LLC which would be for solo 401(k) investment purposes only not for your self-employed business, then this can be done but it’s not a requirement in order to make solo 401(k) investments.
Flipping Properties and State of Registration QUESTION:
This LLC would be flipping properties in both Pittsburgh, Pennsylvania and Detroit, Michigan. Given this, which state should the LLC be registered in?
Investors generally have the LLC registered in their state of residence. Note that flipping properties in a solo 401k owned LLC will trigger unrelated business income tax to the solo 401k. Reason being, real estate flipped inside a solo 401(k) LLC is viewed as an active business activity; therefore, a tax known as unrelated business income tax (UBIT) applies. The UBIT tax rate is quite steep- generally at a rate of 38% and applies each year on profits over one thousand dollars.
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.
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Could you use a solo 401k —> LLC set up to run air BnB’s? Or is this only for long term rentals? Even with long term rentals, how do you handle the costs & business dealings? Through the LLC part? Direct checking account debits, since you can’t do a credit card?
A limited liability company that is funded with solo 401k funds is generally used for investing in long term real estate rentals to produce passive, rental income.
While the solo 401k owned LLC may be invested in Airbnb rentals, the rental income may subject to unrelated business income tax (UBIT).
While the UBIT rules are complex and depend on the facts and circumstances, short term rental income earned from real estate owned by a Solo 401k will generally be subject to UBIT if such income constitutes business income.
While income earned from leasing real estate is typically considered non-business rental income, the IRS has identified certain scenarios where real estate rental income is treated as business income.
The average period of customer use is 7 days or less.
The average period of customer use is 30 days or less and significant personal services are provided with the rental.
See Treas. Reg. § 1.469- 1T(e)(3)(ii)
As such, if Solo 401k real estate is rented via Airbnb on a short-term basis as described in one of the above scenarios, the income would generally be subject to UBIT.
The solo 401k funded LLC may obtain a debit card for use in paying for LLC owned real estate expenses.
Given the volume of activity associated with an AIRBNB, the management would need to be provided by a third-party management company and paid for with funds from the solo 401k funded LLLC.
Thanks for the great info. Two questions: (1) If I personally have a property under contract to purchase, may I assign the rights of that Purchase & Sale Agreement to the solo 401k LLC? (prior to ever personally taking ownership). (2) I’m a Realtor and know I cannot take a commission on the transaction – can I simply credit all funds to reduce the Purchase Price at closing? In other words, it would show up as credit to the Solo 401k LLC on the closing statement and I never receive any funds personally. Thank you!
1. Assuming no funds have yet been put down (e.g., the earnest deposit) and the property is not currently owned by your family members (e.g., children, parents, spouse, etc.), you will want to work with the title company to redo the purchase documents. On the other hand, if any funds have already been put down, you run the risk of running afoul with the solo 401k prohibited transaction rules such as the following: “Sale, exchange, or leasing of property between a plan and a disqualified person.”
2. You are technically a disqualified party since your are the participant of the solo 401k that in turn is the member of the LLC, so whether you receive a commission or not, you should not be the acting agent for the real estate transaction.
Why would I need to set up a solo 401k owned LLC if I can simply place my tax liens and real estate directly through the solo 401k plan? What’s the upside/downside to each approach?
You are correct that you can place the same alternative investments directly through the self-directed solo 401k as with a solo 401k owned LLC. A popular reason to form an LLC is for liability protection from general creditors since protection for solo 401k plans falls at the state level just like for IRAs.
A solo 401k owned LLC where the solo 401k is the sole member is still subject to the solo 401k rules (e.g., prohibited transaction rules, it can’t be used to operate a business, etc.) and the gains from the investment (e.g., a rental property) continue to grow tax free if Roth solo 401k funds were invested.
I’m expanding my assisted living home business from one to two houses. The first home I bought with personal funds in 2021 and operate the home healthcare business currently from that property, but as I understand there is no way to transfer that property to the solo 401k LLC.
My question is this, can I establish a solo 401k LLC and invest in another residential property, and then have the assisted living LLC rent that home from the solo 401k LLC?
When Mysolo401k.net sets up a self-directed Roth Solo 401k with Fidelity and creates a single-member LLC. Does fidelity allow for the transfer of funds from solo 401k to the Bank account opened under the LLC? If so, What is the cost of Creating the LLC for the self-directed Roth Solo 401k?
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13 Comments
Could you use a solo 401k —> LLC set up to run air BnB’s? Or is this only for long term rentals? Even with long term rentals, how do you handle the costs & business dealings? Through the LLC part? Direct checking account debits, since you can’t do a credit card?
A limited liability company that is funded with solo 401k funds is generally used for investing in long term real estate rentals to produce passive, rental income.
While the solo 401k owned LLC may be invested in Airbnb rentals, the rental income may subject to unrelated business income tax (UBIT).
While the UBIT rules are complex and depend on the facts and circumstances, short term rental income earned from real estate owned by a Solo 401k will generally be subject to UBIT if such income constitutes business income.
While income earned from leasing real estate is typically considered non-business rental income, the IRS has identified certain scenarios where real estate rental income is treated as business income.
The average period of customer use is 7 days or less.
The average period of customer use is 30 days or less and significant personal services are provided with the rental.
See Treas. Reg. § 1.469- 1T(e)(3)(ii)
As such, if Solo 401k real estate is rented via Airbnb on a short-term basis as described in one of the above scenarios, the income would generally be subject to UBIT.
The solo 401k funded LLC may obtain a debit card for use in paying for LLC owned real estate expenses.
Given the volume of activity associated with an AIRBNB, the management would need to be provided by a third-party management company and paid for with funds from the solo 401k funded LLLC.
Thanks for the great info. Two questions: (1) If I personally have a property under contract to purchase, may I assign the rights of that Purchase & Sale Agreement to the solo 401k LLC? (prior to ever personally taking ownership). (2) I’m a Realtor and know I cannot take a commission on the transaction – can I simply credit all funds to reduce the Purchase Price at closing? In other words, it would show up as credit to the Solo 401k LLC on the closing statement and I never receive any funds personally. Thank you!
1. Assuming no funds have yet been put down (e.g., the earnest deposit) and the property is not currently owned by your family members (e.g., children, parents, spouse, etc.), you will want to work with the title company to redo the purchase documents. On the other hand, if any funds have already been put down, you run the risk of running afoul with the solo 401k prohibited transaction rules such as the following: “Sale, exchange, or leasing of property between a plan and a disqualified person.”
2. You are technically a disqualified party since your are the participant of the solo 401k that in turn is the member of the LLC, so whether you receive a commission or not, you should not be the acting agent for the real estate transaction.
Why would I need to set up a solo 401k owned LLC if I can simply place my tax liens and real estate directly through the solo 401k plan? What’s the upside/downside to each approach?
You are correct that you can place the same alternative investments directly through the self-directed solo 401k as with a solo 401k owned LLC. A popular reason to form an LLC is for liability protection from general creditors since protection for solo 401k plans falls at the state level just like for IRAs.
I am 44 year old mom Thank you so much!
Thanks for this! Is an LLC owned by a Solo 401(k) also tax-exempt, if the money from the 401(k) used to fund the LLC is post-tax/ROTH?
A solo 401k owned LLC where the solo 401k is the sole member is still subject to the solo 401k rules (e.g., prohibited transaction rules, it can’t be used to operate a business, etc.) and the gains from the investment (e.g., a rental property) continue to grow tax free if Roth solo 401k funds were invested.
I’m expanding my assisted living home business from one to two houses. The first home I bought with personal funds in 2021 and operate the home healthcare business currently from that property, but as I understand there is no way to transfer that property to the solo 401k LLC.
My question is this, can I establish a solo 401k LLC and invest in another residential property, and then have the assisted living LLC rent that home from the solo 401k LLC?
Good question an such transaction would still be prohibited, as you can’t do indirectly what is not allowed directly (roundabout transaction).
When Mysolo401k.net sets up a self-directed Roth Solo 401k with Fidelity and creates a single-member LLC. Does fidelity allow for the transfer of funds from solo 401k to the Bank account opened under the LLC? If so, What is the cost of Creating the LLC for the self-directed Roth Solo 401k?
Note that an LLC is required for a solo 401k like it is for an IRA if you want checkbook and wire control over your solo 401k funds. However, if you do proceed with an a solo 401k LLC, no, Fidelity does not provide brokerage accounts for solo 401k LLC but will provide brokerage accounts for a solo 401k offer by a company like My Solo 401k Financial. See the following: https://www.mysolo401k.net/solo-401k/compare-free-fidelity-investments-solo-401k-vs-self-directed-solo-401k-from-my-solo-401k-financial/
Also, if you proceed with the setup of LLC for your solo 401k, see the following: https://www.mysolo401k.net/solo-401k/solo-401k-llc-setup-process-cost/
Yes, a bank account may be set up for the solo 401k LLC at the local bank and then funded with funds in the solo 401k.