What is the Solo 401k LLC?

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Being your own trustee of the Solo 401k plan is great. You have the freedom to invest in alternative assets like real estate, precious metals, cryptocurrencies, private placements, and more. Though the field of self-directed investing has been around for almost 30 years, we still hear stories of investors stopped in their tracks by someone unfamiliar with the Solo 401k plan. Maybe it’s the title company who doesn’t know how the title should read on your new property. Maybe it’s the cryptocurrency exchange who wants to deny your account because they see the word “401k” in the title. Or maybe it’s the brokerage account who doesn’t understand how you can direct your own retirement investments. Some people like to use an LLC to invest their 401k money into an LLC and that can make it simpler and easier to open accounts at brokerages, crypto exchanges, easier closing process on properties and even adds a layer of asset protection.

Required: Special Purpose LLC

Because retirement accounts have special rules, you can’t use an LLC that already exists. In fact, it’s prohibited for your Solo 401k plan to invest in an LLC where you’re the member. This is called a prohibited transaction and it has very stiff penalties. Just forming any general purpose LLC may not be compliant with IRS rules either. Instead, you have to have a specially formed LLC that is specifically designed to be owned by your Solo 401k. This Solo 401k LLC is different than your business. Even though your business may also be an LLC, there are far more differences than similarities. Notably, the Solo 401k LLC is made for passive asset holding and investing only. It may not carry on any general business activities. Whenever you’re working with retirement assets, you have to keep passive assets and business activity completely separate.

LLC Member and Manager

With a Special Purpose LLC, your Solo 401k trust is the member and you are the manager. This allows you to retain Checkbook Control of your retirement funds just like you have with the Solo 401k. The member of the LLC is generally who funds the LLC. In this case, because the member is your Solo 401k, the only money that can come into the Solo 401k LLC is money directly invested from the 401k trust.
Solo 401k LLC Diagram
Using a Solo 401k LLC can help make real estate closings easier while you still maintain Checkbook Control
The Solo 401k LLC will have its own specially designed Operating Agreement. In this document, the responsibilities of the manager (you) are outlined and prohibited transaction details are discussed as well.

Funds Flow

After the LLC is formed, it will need a special tax ID number from the IRS. The process to get an Employer Identification Number (EIN) from the IRS for the Solo 401k LLC is different than that of a general purpose LLC. Make sure you get help in having experts form your Solo 401k LLC and obtain the tax ID number for the new entity. Once the LLC has its tax ID number, you can open a bank account for the Solo 401k LLC. Generally, you can open the bank account anywhere as most banks are familiar with the LLC structure.
Helpful hint: Your banker and even the branch manager is unlikely to be aware of the structure and strategy of the Special Purpose LLC with your Solo 401k trust. The banker’s job is to open a bank account for your new LLC. Keep things simple and don’t try to explain the Solo 401k LLC. Just open the LLC bank account, get the checkbook, and move onto investing.
The Solo 401k then invests funds into the Solo 401k LLC. This can be done by writing a check or sending a wire from the Solo 401k trust bank account to the LLC bank account. Make sure to complete a Solo 401k investment direction form and keep that in your plan records to document the flow of funds from the Solo 401k into the Solo 401k LLC.

Asset Titling

Buying a property becomes a breeze with the Solo 401k LLC. Now that the Solo 401k funds are invested into the LLC, the LLC can purchase assets. With a real estate closing, simply title the property in the name of the Solo 401k LLC. Your LLC name can be anything you want, and does not need to include the word “401k”. This makes it easy for title companies to do their job without trying to figure out the ins and outs of retirement account asset titling. When your property receives rent checks, deposit those funds directly into the Solo 401k LLC bank account. Similarly, any expenses, taxes or repairs on the property need to be paid for by the Solo 401k LLC. Never pay for Solo 401k LLC assets with personal or business funds as that would be a prohibited transaction. If your LLC doesn’t have enough money to cover an expense or repair, you can invest more money from the Solo 401k into the Solo 401k LLC. Remember the funds must flow from the Solo 401k into the Solo 401k LLC.

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