Solo 401k questions for the newbie investor

[Phillip Henderson]

I am new to the real estate game. I have only recently started saving money to begin investing into real estate. I am currently working at a w2 job and also putting money into the 401k offered at work. I recently purchased Tax Strategies for the Savvy Real Estate Investor and it mentioned a solo 401k as tax deferred option for investing in real estate. I started researching the solo 401k and the articles I have read kept mentioning "earned" income. I am looking to start my portfolio with buy and hold properties and the passive income does not allow me to open a solo 401k. Is that what I have read or am I misinterpreting it? Also if I am able to open one am I able to put income from my w2 job into it or is a self directed IRA my only option right now?

[Brian Eastman]

@Phillip Henderson

It does not sound as if a self-directed Solo 401(k) would fit your situation at the current time.

The Solo 401(k) is an employer sponsored retirement plan.  This means there has to be a business that establishes the plan as a benefit for employees.  Holding rental properties is a form of passive income, not business income.  As such, your portfolio of rental homes would not be considered a business capable of sponsoring a Solo 401(k) plan, nor would it make sense to attempt to re-configure a rental business to accomplish this goal.  Passive rental income is very tax-favorable as it is.

Your current employer 401(k) monies are likely trapped in that plan.  Contribute, take advantage of the tax savings and potential employer match, and build yourself some tax-sheltered savings.

If you have existing retirement funds outside of your existing employer 401(k), those could be rolled over into a self-directed IRA. This would give you the potential to diversify that savings outside of the stock market and into alternative assets such as real estate. Keep in mind, however, that the IRA(or 401k if you ever get there) is investing in real estate on a standalone basis separate from you. These vehicles are not a means for you to obtain access to tax-sheltered funds, but rather a way to deploy the tax-sheltered funds differently.