In the spirit of order of operations, might be helpful to break down in this fashion:
1) With your 401(k), do you have pre-tax money and post-tax Roth funds? If so, you will need to rollover those funds into respective money sources of pre-tax and Roth.
2) Analyzing whether to use IRA or Solo 401(k), is fairly straight forward, when the intent is for you to have your own business and want to use the funds for real estate investing. Most likely you will establish a Solo 401(k), due to the additional benefits, some of which were already mentioned. If you have pre-tax and post tax Roth funds in the existing 401k, you will initiate a rollover into a newly formed Solo 401(k), with some funds dropping into the pre-tax bucket and Roth funds dropping into Roth bucket.
3) 3 benefits that I find many real estate investors are attracted to with the Solo 401(k): 1) Higher Contribution Limits (providing you have enough earned income) 2) Ability to contribute to Roth, without MAGI limits where you have to do a backdoor contribution, like you do a Roth IRA. 3) Exemption from UBIT/UDFI on debt financed real estate deals, this could be directly, or through a syndication type deal.
4) Now, we can proceed with, what about the caveats and qualifications to open and maintain a Solo 401(k): 1) You need to have earned income from the business/sole prop. that is sponsoring the Solo 401(k). Your contributions have to be recurring and substantial. I will say, being the industry for nearly 20 years, this is a huge problem. I see folks who have Solo 401(k)'s, but only have passive income. If all you do is own rentals for example, likely not qualified with a Solo 401(k). You might consider getting with your CPA and discussing a strategy to have a micro-business and show some earned income. 2) You can't have any W-2 employees, with the exception of yourself, a spouse, and any partners that own at least 5% of the business. (Keep in mind controlled group rules, meaning if you own a business with W-2 employees, you often can't just setup a side business and open a Solo without giving benefit to your W-2 employees with your main business - another area not often discussed in this industry until it is too late).
5) Lot's of pros with Solo 401(k)'s as you can tell from above with the UDFI exemption on debt financed real estate and ability to make larger contributions. There can be more compliance work and potentially higher costs compared to just a Self-Directed IRA.
6) If you decide to rollover to a Self-Directed IRA first (your pre-tax money) you can always rollover that money into a Solo 401k when you eventually qualify. Just keep in mind, if you move money into a Roth IRA, you can't move from Roth IRA into the Solo 401(k). You can however move from 401(k) Roth funds into the Roth bucket of the Solo 401(k).
Hopefully this gives you some ideas to run with.
This should not be construed as tax, legal or financial advice. This is merely education. Please work this material through your professionals and seek the proper advice.
