Real Estate Investing with a Solo 401(k)

Real Estate Investing with a Solo 401(k)

  SOLO 401(K)5 Minute Read

Last Updated on June 7, 2021

Real Estate Investing with a Solo 401(k)

You can invest your 401(k) in real estate when you establish a Self-Directed individual retirement account, such as a Solo 401(k) or a Roth Solo 401(k) for real estate. When we say “invest your 401(k) in real estate”, we are not referencing a traditional, employee sponsored 401(k). In fact, you cannot use your 401(k) to invest directly in real estate. You can use a Solo 401(k) if you’re a small business owner with no employees or a self-employed individual.

The Solo 401(k), also known as the self-directed 401(k), was created by the IRS to specifically aid:

  • Self-employed individuals
  • Individuals who actively generate a portion of their income through self-employment activities
  • Small business owners with no employees (except for themselves or a spouse)

Establish a Solo 401(k) Retirement Plan

Prior to purchasing real estate, you must first establish a self-directed Solo 401(k) plan.

Advantages of the “Checkbook Control” Self-Directed Solo 401(k) Plan

  • Created by the IRS specifically for the self-employed or small business owner with no full-time employees
  • Receive a customized IRS approved open architecture self-directed solo 401(k) plan
  • Gain the ability to make traditional investments, such as stocks, but also all IRS approved alternative asset investments, such as real estate.
  • Help build your retirement nest egg by contributing up to $58,000 per year ($64,500 if age 50 or older) – almost 10 times the maximum contribution amount of an IRA
  • Contribute to your plan using pre-tax or Roth (after-tax) funds. Below, please find a link that discussed the benefits of using Roth funds to purchase real estate
  • Borrow up to $50,000 tax- and penalty-free and use those funds for any purpose, whether personal or business
  • Invest in what you know and understand without tax, such as real estate, precious metals, tax liens, hard money loans, private businesses, and much more.
  • As trustee of the plan, making an investment is as easy as writing a check or executing a wire transfer.
  • Generate tax-deferred or tax-free income or gains on your plan investments
  • Open your self-directed Solo 401(k) plan at Capital One Bank – no need for a special IRA custodian
  • Asset & creditor protection
  • Purchase real estate with leverage without triggering tax
  • Receive an IRS opinion letter confirming the legality of the plan

How does it work?

  • Your assigned solo 401(k) plan tax specialist will work with you to customize your Solo 401(k) plan based on your investment, tax, and retirement goals
  • The new Solo 401(k) plan account can be opened at Capital One Bank
  • Fund the Solo 401(k) plan with a rollover of any pre-tax retirement funds, or by making a tax-deductible or after-tax (Roth) contribution directly to the new plan account
  • All income and gains generated by the Solo 401(k) plan investment will generally flow back to your Solo 401(k) plan without tax
  • No annual IRS reporting or filing requirements if your plan assets are below $250,000
  • We will handle all IRS plan administration
  • No transaction fees
  • No asset valuation fees
  • Investing is as easy as writing a check!
  • No plan termination fee

How do I invest my 401k myself?Self-Directed 401(k)

Can I Invest My 401k Myself? – The Nest › Investing › How to Invest

self-directed 401(k) allows you to invest part of your account in individual stocks, mutual funds or other investments that you select outside of the dozen or so …

If your plan offers this option, it may call it a brokerage window. This allows you to purchase individual stocks, mutual funds or other investments that you choose that are not part of the normal 401(k) plan.

What can a self-directed 401k invest in?That includes some alternatives to the usual stock and bond funds. As of 2020, the IRS permits selfdirected IRAs to invest in real estate, development land, promissory notes, tax lien certificates, precious metals, cryptocurrency, water rights, mineral rights, oil and gas, LLC membership interest, and livestock.

Doing It Yourself: The Self-Directed 401(k) and IRA › … › 401K

The first typically contains a menu of age-based, target-date funds and other mutual funds covering most asset classes. The other is a “brokerage window,” or self-directed 401(k), for people who want more control over how their retirement nest egg is invested.

Can I Invest My 401k Myself?

Big companies have added the self-directed option as they’ve cut the number of mutual funds in their plans. About 30 percent of large and midsize employers offered brokerage windows in 2011, according to benefits consulting firm Aon Hewitt. But even among the companies that offer a self-directed option, your typical investor isn’t using it. The Vanguard Group reports 23 percent of their 401(k) participants are offered a brokerage window but only 1 percent use it. Fidelity Investments has a similar ratio, reporting 38 percent of its participants have access to a window but only 2.4 percent use one.

Some large companies allow employees to pick their own investments.


Since their introduction in the 1980s, 401(k) plans have evolved. The early plans offered just a few investment choices. Then companies began offering dozens of mutual funds from which to choose. Now, in large employers, one trend is to operate a 401(k) on two tracks. The first typically contains a menu of age-based, target-date funds and other mutual funds covering most asset classes. The other is a “brokerage window,” or self-directed 401(k), for people who want more control over how their retirement nest egg is invested.

Self-Directed 401(K)

A self-directed 401(k) allows you to invest part of your account in individual stocks, mutual funds or other investments that you select outside of the dozen or so mutual funds in the typical plan menu. Your employer decides whether your plan will offer a brokerage window and how much you can invest through it. Your employer can also determine the range of allowed investments. Some may restrict you to mutual funds, while others might allow a broader range of choices, including individual stocks and specialty funds.

Table of Contents

  1. Can you invest in real estate through your 401(k)?
  2. The Process of Investing a Self-Directed 401(k) in Real Estate
  3. Methods to Purchase Real Estate Using Solo 401(k) (Steps Included)

Using Your 401(K) to Invest in Real Estate

Can you invest in real estate through your 401(k)?

When we say you can “invest your 401(k) in real estate,” it does not refer to the traditional, employee-sponsored 401(k). You can invest your 401(k) in real estate only when you establish a Self-Directed 401(k)/Solo 401(k) or a Roth Solo 401(k).

The IRS created Self-Directed 401(k), also known as the Solo 401(k) to aid the following group of people:

  • Small business owners with no employees (except for themselves or their spouse)
  • Self-employed individuals
  • Individuals who generate a portion of their income through self-employed activities

However, if you use your 401(k) to invest in real estate, you cannot:

  • Access the investment income directly
  • Use the funds for a direct benefit for themselves or the disqualified persons

Let’s understand this with an example. Let’s assume that you bought a small property for $120,000 using your Solo 401(k) plan, and that property is rented out for $2,000 for a month ($24,000 a year)

Although you are getting a great return on your investment, you cannot legally use this money for your own benefit. This income has to be returned to your 401(k) plan. Whatever property expenses you incur, such as maintenance, repairs, etc., also has to be paid with the funds in your 401(k).

With a Solo 401(k), you have a wide array of real estate options that you can select from – raw land, residential property, commercial property, private mortgages, and tax liens. You can also choose to buy a home in a place where you’d like to live post-retirement. If the price of the property you wish to buy is more than the money you have in your Self-Directed 401(k) account, you can choose to borrow the balance required through a non-recourse loan.

The Process of Investing a Self-Directed 401(k) in Real Estate

When investing a Solo 401(k) plan in real estate, you need to follow a set of sequential steps depending on the real estate method you use:

  • 01Open a Self-Directed 401(k)Since your Self-Directed 401(k) is going to purchase the property, there are certain rules you need to comply with. You have to use the funds from your Solo 401(k) to pay ALL fees, including the escrow deposit.
  • 02Fund the Self-Directed 401(k)There are various ways to fund the solo 401k plan: annual contributions, transferring funds from other qualified plans, and direct rollovers from retirement plans, such as traditional IRAs, SIMPLE IRAs, and SEP IRAs.
  • 03Determine property purchasing methodThere are typically four methods of investing a Solo 401(k) plan in real estate. They are as follows:
    • All cash purchase
    • Debt financing
    • LLC
    • TIC

However, each method of investment has its own set of rules. To learn more about each of these four real estate investment methods using Solo 401(k) funds, read this.

  • Put property offer together/contract.When you are putting together a purchase offer, ensure that you list the Solo 401(k) as the buyer. Always keep in mind that your Solo 401(k) is a separate entity/investor, and your Solo 401(k) is the buyer, not you. In all the property purchase documents, the Solo 401(k) must be listed.
  • Make earnest deposit.The earnest deposit must be made using the Solo 401(k) funds and not your personal funds. Remember, it’s not you nor your business that is investing in the property; it’s the Solo 401(k), and the IRS wants the earnest deposit to be made using the funds in the Solo 401(k).
  • Funding/ClosingDuring the closing, you, being the trustee of the Solo 401(k), will sign and approve the property purchase documents and then submit them to the closing agent enclosing a check or wire for final funding from the Solo 401(k) bank account.Once the property purchase is closed, you being the trustee of Solo 401(k) has the following responsibilities:
    • Keep all property documents safe.
    • Use Solo 401(k) funds to pay ongoing and recurring property expenses.
    • Deposit the rental income to the Solo 401(k) bank account or brokerage account.

Methods to Purchase Real Estate Using Solo 401(k) (Steps Included)

  • All Cash Purchase
    This is the most common method of using Solo 401(k) funds to invest in real estate. Under the all-cash method, the Solo 401(k) owns the property free and clear.
  • Solo 401(k) Plan Real-Estate Investment Using a Non-Recourse Loan (Debt Financing)
    In this method, the Solo 401(k) takes a loan from a bank or an investor to purchase the property. Like any other loan, if it is not repaid, the lender has the legal right to take ownership of the real estate. That said, one important thing to note here is that the lender has no recourse to touch your Solo 401(k) assets. Only the real estate, which was used as collateral when taking the loan is at risk, and not Solo 401(k).However, a non-recourse loan cannot be taken from people that fall under the disqualified persons’ umbrella, or from any business that you or your family members own.List of disqualified persons:
    • You, the Solo 401(k) account holder
    • Your spouse
    • Your parents (natural or adoptive)
    • Your children (natural or adoptive)
    • Spouse of your natural children
    • People who provide services to your plan
    • Entities like partnership, corporation, commercial paper, estate, trust, which are controlled by you or your family members
    Steps to purchase real estate through debt financing: Solo 401(k) plan real estate investment using a non-recourse loan
    • Open a Self-Directed 401(k)
    • Fund the Self-Directed 401(k)
    •  Select a non-recourse loan lender
    • Put together the property contract/offer
    • Make the earnest deposit
    • The non-recourse loan lender releases loan amount to Solo 401(k) plan
    • Funding is done, and the property deal is closed
  • Placing Solo 401(k) Plan Real Estate Investment Using a Single Member LLC
    Solo 401(k) real estate investments are generally made through the Solo 401(k) plan. However, some investors may establish an LLC for making real estate investments.Steps to real estate investment using a single-member LLC
    • Open a self-directed Solo 401(k) plan
    • Fund the self-directed Solo 401(k) plan
    •  Register the LLC with the Secretary of State (usually the state where you reside)
    • Draft the Special Purpose Solo 401(k) LLC Operating Agreement, outlining both the Solo 401(k) rules and IRS rules
    • Get Employer Identification Number (EIN) for the LLC from Do not use the Solo 401(k) trust’s EIN
    •  Open an LLC bank account. The LLC bank account is separate from the Solo 401(k) bank account
    •  Use your Self-Directed/Solo 401(k) to fund the LLC
    • Start making investments under the Solo 401(k) funded LLC. Make your property offers using the name of the LLC and not your Solo 401(k) plan
  • Co-Investing Solo 401(k) Funds Through a Tenants in Common Transaction
    This is a creative way to invest your Solo 401(k) funds in real estate. In this method, you partner with another investor or another Solo 401(k) owner and invest through a tenants in common (TIC) investment.This method allows you to purchase real estate with your Solo 401(k) and others personal funds too. However, the ownership is split 50/50, 60/40, or whatever is agreed upon in the agreement. Also, all income and expenses are split according to the percentage allocated to all owners in the agreement. This arrangement allows you to invest with certain family members too but not disqualified persons.Steps to real estate investment using TIC:
    • Establish a self-directed Solo 401(k) plan
    • Fund the self-directed Solo 401(k) plan
    • Choose the other TIC investors
    • Make the earnest deposit
    • Funding closing
    Rules to Invest in Real Estate Using 401(k)The IRS provides a list of approved investments for Solo 401(k) plans, but the Employee Retirement Income Security Act of 1974 (ERISA) contains certain rules that apply to sol0 401(k) investments.
    • Any properties purchased with Solo 401(k) must be for rentals.
    • The real estate purchased should be titled in the name of the Self-Directed 401(k) plan.
    • Self-Directed 401(k) plan cannot invest in collectibles, such as antiques, art, gems, alcoholic beverages, or coins. Investments on certain precious metals are allowed if they meet the specific requirements.
    • Disqualified persons are the owner employee participating in the Solo 401(k), lineal descendant, spouse, any spouse lineal descendant, your natural parents, natural grandparents, and ancestors.
    • The disqualified person cannot use the property at all for personal benefits. It is entirely off-limits.
    • Solo 401(k) plan owners cannot work on the property, not even perform a simple task of changing the bulb. All maintenance and repair work has to be done by an unrelated third party.
    • Qualified persons – your brothers, sisters, cousins, uncles, aunts, and mother-in-law can live in the property and pay rent.
    • The deposit and the purchase price for the property have to be paid using the funds in the Solo 401(k) plan or funds from a non-disqualified third-party.
    • The sale, lease, or exchange of property between a plan and a disqualified person is prohibited.
    • You cannot use your personal funds or funds from any “disqualified person.”
    • Depreciation from real estate held by a retirement account is not allowed
    • You cannot lend money or extend credit to your Solo 401(k).
    • All income, gained as well as lost from your Self-Directed 401(k) plan-owned real estate investment should be allocated to the Solo 401(k) plan.
    • You or any disqualified person is prohibited from loaning money to your Solo 401(k) for any reason, and that also includes investing in real estate. You can manage the real estate owned by your Solo 401(k) plan; however, you cannot take compensation for doing it. Your managerial functions may include arranging for contractors, writing checks from your Solo 401(k) bank/brokerage account for paying property tax, collecting rent checks, etc.
    • The Solo 401(k) owner/participant cannot purchase the property from his or her Solo 401(k)plan