Solo 401k financing rules?

[Doug Ringwelski]

Hi, first post here... I've done several residential rental purchases in the past, but it was always with my own cash downpayments (cash I had readily on hand...). I've become more interested in the Solo 401k's as a potential way to free up more savings/cash I have to do additional deals. But as I've been researching the do's and don't do's within Solo 401k's, I read (correct me if I'm wrong on any of this...), that if I create a LLC to buy a commercial property, I can potentially set up a Solo 401k within the LLC, and use my own 401K money to buy/invest in that property. I read though that a constraint would be that I can't then 'work' on my own property, I would need to hire all the work out. But I've also read I can take out a loan (up to $50K) against this Solo 401K, and use the loan money for almost anything...

So... what I'm wondering, is could I set up a Solo 401K with $100k of funds, take out a loan for $50K (understand I need to pay it back within 5 years...?), and use that $50K of loan money as a down payment on the property I want to buy... Therefore if that $50K was 'loan money', I could then buy the property 'free' of Solo 401k rules, and would I still be able to do all the maintenance work/project work on that property myself?  (Hopefully that all makes sense...).  (I could then use the other money leftover in the Solo 401k to invest in other/different investment vehicles--within the Solo 401k rules...)

Thanks!

[Dmitriy Fomichenko]

@Doug Ringwelski

In order to qualify for a Solo 401k plan you must have legitimate business or self-employment activity with earned income. You don't have to have an LLC to set up Solo 401k, the key here is earned income. The second criteria you must meet is that you can not have full time employees (over 1,000/yr) work for you in any business that you own.

If you qualify - you can set up truly self-directed Solo 401k plan. You can fund it with a rollover from any other qualified retirement plan except Roth IRA (IRS doesn't allow that). These plans are known as great tax-shelter, allowing you to contribute up to $56,000 per year, per participant (over $100,000 for husband/wife business), think how much you can save in taxes!!

You then can invest into virtually any investment opportunity, expect collectables, also have to watch out for prohibited transaction which usually result when disqualified person is involved in 401k transaction. All income from investments owned by 401k belongs to the 401k. As disqualified person you are not allowed to provide any services to the plan (work on the property that your 401k owns).

If the plan allows for participant loan - you can borrow up to $50,000 or 50% of the balance, whichever is less, the loan proceeds can be used for any reason. However borrowing from your 401k to invest may not be the best financial decision, the key with qualified plans is you want to maximize your investment returns, because they will not be taxed until later at retirement, which means that you can accumulate wealth much faster. 

Hope this helps!