Using a Solo 401(k) to protect real estate profits

[Jeff Takle]

Would be interested to hear if anyone has more/better/different information on this issue:

I just set up an Individual 401(k) for my consulting company, which is a single-member LLC. I'm wondering if this might also apply for short-term real estate investment company. As an employee, I can put up to $15,000 of salary deferral into the 401(k). As the employer (the LLC), I can contribute profit sharing equivalent up to 25% of the employee salary, up to a total employee/employer contribution of $42,000 this year. So...

If consulting brings in $100,000 this year e.g., I can contribute $15,000 of my salary and my company can contribute another $27,000 for a total of $42,000. My taxable income is reduced from $100,000 to $58,000 for a tax savings of around $10,000 in the current year. Not bad, but I'm also short all that cash because it's sitting in my 401(k) waiting for old age. Here's where real estate comes in...

Law allows (though AIG and T.Rowe Price 401k plans do not) that you can invest that 401k (or an IRA) money into real estate. Also, the gains from that real estate are exempt as I understand it from cap gains tax and all cap gains get rolled back into the 401k and can be used without 1031 time restrictions to invest in more real estate. The only taxes you would pay would be on 401k distributions, which you can delay until I think 70.5 years old and can stretch out a long time. End result? Could be a great way to take ordinary income tax free, flip rental property without capital gains penalties, and end up with a few income-producing properties fueling your 401(k). Ahhh, there's the catch--you can't get your money out.

Any thoughts?

[Kevin Amolsch]

If that is true would you consider yourself having a higher risk of violating an IRS regulation and getting a tax penalty? Seems like it might be worth the hassle to have a trustee or custodian who keeps up with rule changes looking over your shoulder.

I guess it depends on your understanding and comfort level with what is and is not allowed.