Solo 401(k) with Husband/Wife Tax/Non-Tax Funds?

Question

Hi all, I'm looking for some advice on how I can best structure my retirement account real estate investments to leverage my real estate knowledge for these long-haul accounts.

Background: Experienced and diverse real estate investor who is recently discovering Solo K and S-D IRA options for my retirement accounts.  We hold and manage our investment properties under a family LLC.  My wife and I have the following accounts exposed to the market which we'd like to efficiently, all or in part, invest in real estate instead: Husband: 401(k), Roth 401(k), Roth IRA.  Wife: 401(k), Roth IRA.

Questions: Since we own and manage our real estate holdings under an LLC solely owned by my wife and I, are we a qualified self-employed business eligible for a Solo 401(k) program?  (From what I've read, I would prefer to go with the Solo K if we qualify.)

If we were to establish a Solo K program under our existing LLC, could we roll all of our respective accounts under this structure while maintaining their respective tax and 'individual' rules?  My thought would be we would have his/hers, pre-/post-tax accounts (4 different pots of money) within the Solo K and when we structured a new asset holding LLC under the Solo K, that each of the 4 accounts would simply own respective shares of that new LLC entity. Is this allowed by the IRS?

Finally, any advice on a high-quality and efficient Solo K custodian?  I've browsed a number of articles from mysolo401k and they seem to have a lot of happy customers.

Thanks!

Ashish Acharya · Answer

As @Dmitriy Fomichenko mentioned, you need earned income.  There are ways to convert your passive rental income to earned income via management fees. These fees will be taxed extra if not contributed to Solo 401k, so you need to commit to doing so.

There are other complications that you might want to bring this to your tax advisor's attention.

Daniel Dietz · Answer

@Ian Turner, to my understanding, what you would have to do is set up a separate company that your pay a management fee to, and that turns into the 'active income for you. One downfall of this say you paid yourselves 20K for this. That 20K is now subject to SSI taxes of roughly 14%, and you have to do a payroll too. A great source of info on this is Mark Kohler from KKOS Lawyers and Accountants on your tube.

Dan Dietz

Dmitriy Fomichenko · Answer

Ian,

Rental properties produce rental income, which is considered “passive” by the IRS. To qualify for Solo 401K you need “earned” self-employment income.

If you were eligible - you could rollover any retirement plan into Solo 401K except Roth IRA (IRS does not allow that). If the 401K is with the current employer - they likely won’t allow you to move that account. You can pull funds together into single investment under Solo 401K.

Do you have any self-employment income that you report on a schedule C of your tax return?

Dmitriy Fomichenko · Answer

@Ian Turner

Trust me, there is a value to have a tax expert. You need not just a tax preparer but someone who can help you with the tax strategy. Yes, I will send you a private message.

Todd Goedeke · Answer

@Ian Turnerconsider starting a business with an EIN number that manages your flips and RE you buy and hold. Management business generates minimal income to minimize FICA taxes. Fact you have business income allows you to funnel all existing 401k and IRA money ( not Roth IRAs)into new Solo 401k. Solo 401k allows for more advantageous investment rules as compared to SDIRA.

Ian Turner · Answer

@Dmitriy Fomichenko,I flip on average 1 per year maybe, basically to bankroll the next rental.  At this point I don't have a solid CPA that knows real estate at all.  I've been considering the value a real estate savvy CPA could bring to my operations and perhaps now is the time to make the switch.  Please DM me if you have a recommendation I should explore.

@Daniel Dietz  My primary goal here is to enable real estate investments with my EXISTING retirement accounts and I'm not as concerned with the future contributions aspect as much.  Considering the questionable qualification status of my LLC, the nominal amount of flipping I'm doing, and the aspect of paying SSI, I'm wondering if a SD IRA is more appropriate for me at this time?

Dmitriy Fomichenko · Answer

@Ian Turner

It looks that you have an LLC that is holding entity (it holds your rentals). This is not an active business and you won't be able to structure Solo 401k under it. You need entity that generates earned income to sponsor 401k.

You should discuss your strategy with your CPA who can give you proper guidance based on your overall situation and goals. If you don't have one - you should definitely hire one, there are some good ones here on BP.

Ian Turner · Answer

Thank you all for the excellent insight.  So no, at this point we do not report any income on Schedule C.  For the past 10 years or so, we've had W-2 income and not touched our real estate profits for personal use.  We hold most of our investments within an LLC but under some circumstances, we've ended up with some properties in our names.  Anyway, all rental and sales proceeds enter the same LLC checking account and end up rolled into the next investment.

I like the idea of charging a management fee to generate Schedule C income.  Functionally, how would that work for our situation?  Investment income generated currently comes to the LLC that we want to structure the Solo K under.  If we pay ourselves from the LLC, does that qualify or does it need to flow the other direction?  We could start collecting the income under our personal accounts and pay the LLC for property management if that makes a difference.

Mary K. · Answer

As Ashish mentions, I thought others on BP had mentioned getting around the "passive" rule by paying yourself a property management fee from your LLC, which could then be considered self-employment income ("earned income"). Maybe search for that info and talk to those who do this.

Solo 401(k) with Husband/Wife Tax/Non-Tax Funds?

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