Absolutely Confused...Let's Get Real about SOLO-401K's

[Gary Kane]

I have been reading (scouring) the forum on SDIRA/SDIRA-LLC/SOLO-401K information, and am absolutely confused! And the more I read, the more cautious I am getting!

So what is the real deal on these setups?  Do I need to worry about the IRS breathing down my back every year with my SDIRA? Or SOLO-K?

And let's clear the air on SOLO-K's...what is the true requirement on being eligible to set up one of these for REI'ing?

1. I am a full-time W-2 employee, with a 401K already.
2. I am not self-employed (earned income), but some say I could be easily (EBay, MLM, etc.).
3. Does selling on EBay REALLY qualify as self employed, able to set-up a SOLO-K? A backdoor?
4. How long do you have to be self-employed before REI'ing.
5. Wouldn't the very nature of doing REI'ing (Rehab and sell) qualify as earned income? Wait, you have no proof of earned income yet, how can you have a SOLO-K...chicken vs the egg syndrome?
4. So the IRS thinks I'm an EBay seller, and now I have all this REI income (Buy and hold, Rehad/Flip, etc.). What will the IRS say?

All my scouring has led me to believe that a SOLO-K would be more efficient for REI. I want a few rentals, and do some Buy/Rehab/Sell for profit, and also do some JV's (lending)...But I want to be legit and not worry about violating any IRS rules.

Need some help...hope I'm not rustling some feathers, just need some clarification.

[Brian Eastman]

@Gary Kane

In order to establish a Solo 401k, you need to have an active business with the potential to make contributions to the 401k plan.  This can be something fairly minimal, so long is it produces legitimate income that you report on your taxes, such as with a schedule C.  The benefits of the 401k, however, are mostly focused on higher contributions, which must come from the income of the business that is sponsoring the plan, so if you are selling $1500 on eBay, is it really worth going through the process of establishing and administering a Solo 401k?  Likely not.

A self directed IRA is an equally viable means to diversify existing retirement savings into real estate, and you do not need to change plan formats if 2-3 years down the road you get tired of dealing with eBay and are no longer self-employed.

The IRS is not specifically targeting self-directed retirement plans.  

You do seem to be confused about the business that sponsors the plan and the investment activities of the plan. If you setup a self-directed IRA or Solo 401k and invest that plan in real estate, that is the plan investing in those assets. That is not income to you that goes on your tax return, and the investments of the plan are not the business that sponsors the plan. That would be akin to a snake eating its own tail.

Too much time on the internet can definitely lead to confusion on these topics.  There are some professionals here on BP with a ton of expertise that can help you boil down the matter to the specifics of your situation.  Get on the phone and have some conversations.  Once you speak to someone who knows what they are doing, you will know, and they will get you on the right path.