Solo 401k Equity Trust Company, Single member LLC: 1099 income not eligible?

[Erik Kubec]

Hello folks,

I have had a Self Directed IRA at Equity Trust Company for a couple of years and highly recommend the company.

As part of our retirement plan, my wife and acquired 4 investment properties as follows: 3 SFRs owned by her and myself, and 1 condo owned by my IRA held in trust at Equity Trust Company.

Well, there is a good chunk of cash in the Self Directed IRA, and recently one of the SFRs incurred a $4,000 capital improvement in the form of tiled floors.

I want to be able to access the $$$ in the retirement account to pay for capital improvements only on the properties, since both 'accounts'/'assets' have the same purpose:  setting us up for retirement.  So with a solo 401k, I can borrow up to 50%/$50k for any purpose.  

So I began to initiate the process to convert the SDIRA to a Solo 401k.  

First, I set up an LLC. On a regular basis, I personally perform work on and for the properties ranging from maintenance to 'asset management': hiring contracts, sourcing materials, etc. This adds up to a few hours a month. So I registered an LLC here in Colorado with me as the sole member, and no employees. The idea is that now the LLC will be performing that work, or more specifically, Erik Kubec as Sole Member of the LLC is performing the work. So the properties will have Schedule E expenses where the money goes from the properties to the LLC.

Now the LLC has to pay Erik Kubec (filing jointly with wife a 1040). The plan is for the LLC to remain a 'disregarded entity' and the income to flow into the 1040, and to pay the self employment taxes.

I got a call from a junior guy at Equity Trust after I had submitted paperwork in which he said that 1099 income is not considered eligible for solo 401k contributions, but W-2 is.  He mentioned that the IRS can only recognize 'earned income', and 1099 is not that.  To further confuse the matter, he said that some folks had found a 'loophole.'  He ended, of course, as he should have, by reminding me to consult a CPA or tax accountant.  

So the question is how will the LLC pay me? As a sole member / no employee LLC, I believe I do not need to run it as W-2, or as 1099.

Do I need to pay myself a regular salary? If so, must I set up a W-2 or can I just pass through? Can I just pay myself pass through profits at the end of the year? I believe I need to pay my self a reasonable market rate for the work I do under/as the LLC, which is fine. And I need to pay the SE tax on that.

Any thoughts on this?