Solo 401(k) vs Self-Directed IRA LLC

[Dave Versch]

I've been reading a lot about both the Solo 401(k) and the Self-Directed IRA LLC. From my layman's perspective, it would appear at first glance that Solo 401(k) is the way to go. No custodian to deal with and higher contribution limits to name a couple of things seem to weigh in its favor. Can anyone tell me the downsides of a Solo 401(k) vs

the SDIRA LLC, if any?

I have two other considerations that I need to keep in mind as well:

1) The account will be initially funded by rolling over some money from an existing IRA. Subsequently, funds will come primarily from tax lien certificate investments and related activities. I'd like to be able to pay myself a salary out of the funds in the account. So, for example, let's say I roll 50K into the account initially, and during the year I make $7500 after expenses. I would like to be able to pay myself the $7500 (or any higher or lower amount, for that matter) as a salary for the work I do pertaining to tax lien investing - property research, attending auctions, administrative duties, etc. I'm thinking that this could be a way to get at some of the funds in my tax-deferred account without having to make early withdrawals and getting hit with penalties, etc. Has anyone done this? Which of the two structures would lend itself better to this type of thing?

2) I currently have a full-time job (unrelated to real estate), at which I already contribute to the company's 401(k) plan. Will this prohibit me from participating in my own Solo 401(k) or SDIRA LLC?

Thanks for reading,

Dave

[Dmitriy Fomichenko]

@Dave Versch 

Brian provided you with number of good points above. Just would like to add my two cents.

1) It would be illegal to pay yourself compensation, regardless if you are using IRA or 401k.

2) You having a full time job will not impact your ability to participate in any of the plans. However you need to keep few things in mind:

• If you already contributing to your employer sponsored 401k plan, this will impart the ability to contribute to your Solo 401k. The salary deferral limit is based on participant, not the plan. In other words, if you contributing to your employer 401k $10,000 for this year, you can only contribute additional $8,000 into the Solo 401k until you reach the limit of $18,000. Those who are 50 year or older have additional $6,000 in catch up contributions. The contributions to Solo 401k plan must come from the earned self-employed income. If you wish to learn the specifics, please PM me and I'll send you a link to educational video on YouTube that spells out all of the contributions details.
• 401k plans are meant to be permanent in nature, therefore you need legitimate self-employment activity (which can be side business or part time self-employment in addition to your full time job) that is continuous. Otherwise your plan may be deemed disqualified and the results of that are not pleasant. 

That being said, if you truly qualify for Solo 401k I believe that it would be superior option over IRA LLC for several major reasons, but again, to piggy-back on Brian's comment above it is important that you speak with the expert about particulars of your own situation.