Solo 401k for Real Estate: Build Retirement Wealth

If you're self-employed or run a small business without employees, you're sitting on one of the most powerful retirement and real estate investment tools available—the Solo 401(k). This turbocharged retirement plan combines massive contribution limits, checkbook control, and the ability to invest directly in real estate, all while building tax-advantaged wealth at an accelerated pace.

While Self-Directed IRAs get more attention in real estate investing circles, Solo 401(k)s offer significant advantages: higher contribution limits (up to $70,000+ annually vs. $7,000 for IRAs), built-in checkbook control, and the ability to loan yourself money. For self-employed real estate investors, consultants, freelancers, and small business owners, a Solo 401(k) can be a game-changer.

What Is a Solo 401(k)?

A Solo 401(k)—also called an Individual 401(k) or Self-Employed 401(k)—is a retirement plan designed for self-employed individuals and business owners with no full-time employees other than a spouse.

It functions like a corporate 401(k) but you're both the employer and the employee. This dual role allows you to make contributions from both sides, dramatically increasing how much you can save annually.

Like Self-Directed IRAs, Solo 401(k)s can invest in alternative assets including real estate. But unlike SDIRAs, Solo 401(k)s come with built-in checkbook control—you don't need to establish a separate LLC or go through a custodian for every transaction.

Who Qualifies for a Solo 401(k)?

You're eligible if you meet these criteria:

Self-Employment Income: You earn income from self-employment, whether full-time or part-time. This includes:

• Freelancers and consultants
• Independent contractors
• Small business owners
• Real estate agents and brokers
• Online business owners
• Side hustlers with 1099 income

No Full-Time Employees: You cannot have any common-law employees who work over 1,000 hours annually (roughly 20 hours/week), except:

• Yourself
• Your spouse (who can participate)
• Partners (in certain structures)
• Employees under age 21
• Part-time employees under 1,000 hours

Examples:

• ✅ Real estate agent with commission income and no employees
• ✅ Consultant with a spouse who helps in the business
• ✅ Landlord operating as a business with substantial real estate income
• ✅ W-2 employee with side business generating 1099 income
• ❌ Business owner with three full-time employees
• ❌ Someone with only W-2 income and no self-employment

Solo 401(k) Contribution Limits

This is where Solo 401(k)s shine—the contribution limits are massive:

2026 Contribution Limits:

• Employee deferral: Up to $23,500 ($31,000 if age 50+)
• Employer profit-sharing: Up to 25% of compensation
• Total combined limit: $70,000 ($77,500 if age 50+)

How It Works: As the "employee," you can defer up to $23,500 of your self-employment income. As the "employer," you can contribute up to 25% of your compensation (20% of net self-employment income for sole proprietors after adjusting for self-employment tax).

Example Calculation: You earn $100,000 net from self-employment.

• After self-employment tax adjustment: ~$92,350
• Employee deferral: $23,500
• Employer contribution: $18,470 (20% of $92,350)
• Total contribution: $41,970

Compare this to a traditional IRA's $7,000 limit ($8,000 if 50+)—you can save nearly 6X more annually.

Traditional vs. Roth Solo 401(k)

Like IRAs, Solo 401(k)s come in Traditional and Roth flavors:

Traditional Solo 401(k):

• Tax-deductible contributions reduce current income
• Tax-deferred growth
• Taxable distributions in retirement
• Required Minimum Distributions (RMDs) at age 73

Roth Solo 401(k):

• After-tax contributions (no current deduction)
• Tax-free growth
• Tax-free qualified distributions in retirement
• RMDs required at 73 (but can be eliminated by rolling to Roth IRA)

Mixing Both: You can split contributions between Traditional and Roth. Many investors use Traditional for employer contributions (maximizing current deductions) and Roth for employee deferrals (building tax-free income).

For Real Estate: Roth is often preferred because rental income and property appreciation grow completely tax-free, and you avoid RMD complications with illiquid real estate holdings.

Solo 401(k) vs. Self-Directed IRA

Both allow real estate investing, but important differences exist:

Bottom Line: If you qualify, Solo 401(k) offers superior contribution capacity and built-in checkbook control. If you're a W-2 employee or have employees, SDIRA is your option.

Setting Up a Solo 401(k)

The setup process is straightforward:

Step 1: Confirm Eligibility Verify you have self-employment income and no full-time employees.

Step 2: Choose a Provider Select a provider that allows alternative investments and offers the features you need:

Providers to Consider:

• Fidelity, Schwab, E-Trade: Low-cost, easy setup, but typically limited to publicly traded investments
• Rocket Dollar, IRA Financial, My Solo 401k Financial: Specialize in alternative investments including real estate
• Mysolo401k.net: Popular among real estate investors, includes checkbook control
• Nabers Group: Full-service with real estate focus

Features to Evaluate:

• Real estate investment support
• Checkbook control included
• Roth option availability
• Loan feature
• Fee structure
• Customer support quality

Step 3: Adopt Plan Documents Your provider supplies IRS-approved plan documents. Review and sign them.

Step 4: Obtain an EIN Your Solo 401(k) needs its own Employer Identification Number (EIN) from the IRS. This takes minutes online at IRS.gov.

Step 5: Open Plan Bank Account Open a checking account in the plan's name using the EIN. This is your checkbook control account.

Step 6: Fund the Plan Make contributions from your business or personal accounts. You can also roll over funds from previous employer 401(k)s or IRAs.

Timeline: Most setups complete in 2-4 weeks.

Checkbook Control: How It Works

Unlike Self-Directed IRAs that require custodian approval for each transaction, Solo 401(k)s give you direct control:

Account Structure: The 401(k) trust has a checking account. You serve as trustee (or co-trustee with your spouse). You write checks, wire funds, and sign documents directly on behalf of the plan.

Advantages:

• Faster transactions (no waiting for custodian)
• Lower transaction fees
• Greater privacy
• Direct negotiation with sellers
• Easier property management

Responsibilities: With control comes responsibility. You must:

• Maintain separate plan bank account
• Never commingle personal and plan funds
• Follow all prohibited transaction rules
• Keep meticulous records
• File required forms (Form 5500 if assets exceed $250,000)
• Make prudent investment decisions

Think of yourself as a professional fiduciary managing someone else's money—because legally, that's exactly what you are.

Using Solo 401(k) for Real Estate

Your Solo 401(k) can invest in almost any type of real estate:

Investment Types:

• Single-family rentals
• Multi-family properties (duplexes, apartments)
• Commercial real estate (office, retail, industrial)
• Raw land
• Fix-and-flip properties
• Real estate notes and mortgages
• Tax liens and deeds
• Fractional interests in larger projects

Purchase Process:

1. Identify property
2. Write offer with 401(k) trust as buyer
3. Open escrow
4. Wire funds from 401(k) checking account
5. Close with deed in name of the 401(k) trust

Ownership Format: The deed typically reads: "John Doe Solo 401(k) Trust" or "ABC Company 401(k) Plan FBO John Doe"

All income goes into the 401(k) account. All expenses are paid from the 401(k) account. The plan owns and operates the real estate completely independent from your personal finances.

Prohibited Transactions: The Critical Rules

The same prohibited transaction rules that apply to IRAs apply to Solo 401(k)s:

Disqualified Persons:

• You and your spouse
• Your lineal descendants and ascendants (children, parents, grandparents)
• Spouses of descendants
• Fiduciaries and service providers
• Entities controlled 50%+ by disqualified persons

Prohibited Activities:

• Living in or personally using 401(k)-owned property
• Selling personally owned property to your 401(k)
• Buying property from disqualified persons
• Renting to disqualified persons
• Performing services on the property (repairs, maintenance, property management)
• Using 401(k) property as collateral for personal loans

What You CAN Do:

• Make management decisions
• Hire third-party property managers
• Hire contractors for repairs
• Rent to unrelated third parties
• Partner with non-disqualified persons
• Sell to unrelated parties

Violation Consequences: The entire 401(k) can be deemed distributed, triggering income tax on the full balance plus 10% early withdrawal penalty if you're under 59½, plus potential excise taxes up to 100% of the prohibited transaction amount.

This isn't theoretical—the IRS actively pursues prohibited transaction violations. Strict compliance is non-negotiable.

Participant Loan Feature

Here's a powerful feature unavailable in IRAs: you can borrow from your Solo 401(k).

Loan Terms:

• Maximum: Lesser of $50,000 or 50% of vested account balance
• Repayment: Typically 5 years (longer for primary residence purchase)
• Interest rate: Prime + 1-2% (you pay yourself the interest)
• No credit check required
• No tax or penalty if repaid on schedule

Real Estate Applications:

• Borrow $50,000 from Solo 401(k) to fund down payment on personal residence
• Use loan proceeds for renovation of personal property
• Bridge financing for other investments
• Emergency liquidity without plan distribution

Important Limitations:

• You cannot loan money from the 401(k) TO the 401(k) to buy property inside the plan
• Loans must be adequately secured
• Must charge reasonable interest
• Defaulted loans become taxable distributions

This feature provides liquidity and flexibility not available with IRAs, though it reduces capital available for plan investments.

Using Leverage: Non-Recourse Loans

Like SDIRAs, your Solo 401(k) can obtain financing for real estate:

Non-Recourse Loan Requirements:

• Loan secured solely by the property
• No personal guarantee
• Lender can only pursue the property in default
• Interest rates typically 2-3% higher than conventional
• 30-40% minimum down payment

UBIT Tax Consequence: Leveraged real estate generates Unrelated Debt-Financed Income (UDFI), a subset of Unrelated Business Taxable Income (UBTI). The portion of income and gains attributable to debt financing is taxable to the 401(k) plan.

Example: Your 401(k) buys $200,000 property with $80,000 plan cash and $120,000 loan (60% leveraged). Annual rental profit is $10,000.

• UDFI portion: $6,000 (60% of $10,000)
• Plan pays tax on $6,000 using trust tax rates
• Remaining $4,000 grows tax-advantaged

Despite UBIT, leverage allows your plan to control larger assets and potentially generate higher absolute returns.

Practical Example: Building Wealth with Solo 401(k) Real Estate

Let's follow a realistic scenario:

Year 1:

• You earn $120,000 from real estate wholesaling business
• Contribute $50,000 to Solo 401(k) (employee + employer portions)
• 401(k) balance: $50,000

Year 2:

• Contribute another $50,000
• 401(k) balance: $105,000 (including 5% investment returns)
• Purchase rental property: $150,000
• 401(k) provides $50,000 down payment
• Non-recourse loan: $100,000
• Remaining 401(k) cash: $55,000 (reserves)

Years 3-5:

• Continue $50,000 annual contributions
• Rental income: $18,000/year gross
• Expenses + debt service: $14,000/year
• Net cash flow to 401(k): $4,000/year
• Contributions + cash flow build reserves for second property

Year 6:

• 401(k) has accumulated enough for second property down payment
• Repeat process with second rental
• First property has appreciated 20% and loan paid down

Year 10:

• Own 3 properties in 401(k)
• Combined equity: $400,000
• Annual cash flow: $25,000
• All growth has been tax-free (Roth) or tax-deferred (Traditional)

Retirement (Age 65):

• Properties worth $1.2 million
• Mortgage balances: $200,000
• Net equity: $1 million
• Option 1: Keep properties, live on rental income tax-free (Roth)
• Option 2: Sell properties, invest in dividend stocks, take distributions
• Option 3: Distribute properties in-kind to personal ownership

This illustrates the compounding power of combining high contribution limits with real estate returns.

Managing 401(k)-Owned Real Estate

Property Management: Hire a professional property manager (paid from 401(k) funds). You cannot personally perform repairs, maintenance, or showings. Typical management fees run 8-10% of gross rents.

Repairs and Maintenance: All expenses paid from 401(k) account. Maintain adequate reserves for unexpected repairs—if the 401(k) runs out of cash, you cannot personally contribute to cover expenses (that would be a prohibited transaction).

Income Collection: All rent goes directly to 401(k) bank account. Never deposit into personal accounts.

Accounting: Maintain separate records for 401(k) real estate. Track income, expenses, depreciation (for UBIT calculation), and fair market value.

Depreciation: The 401(k) can claim depreciation for UBIT calculation purposes, but depreciation doesn't benefit Traditional or Roth accounts the same way it benefits personal ownership (since they're already tax-advantaged).

Annual Compliance and Reporting

Form 5500-EZ: Once your Solo 401(k) balance exceeds $250,000, you must file Form 5500-EZ annually with the Department of Labor by July 31.

Fair Market Valuation: Determine property's fair market value annually for reporting purposes. Use appraisals, tax assessments, or broker price opinions.

Plan Document Maintenance: Keep plan documents current. IRS occasionally releases required amendments that must be adopted.

UBIT Filing (Form 990-T): If your plan has UBTI (from leveraged real estate or active business income) exceeding $1,000, file Form 990-T and pay applicable taxes.

Trust Tax Returns: Depending on circumstances, the 401(k) trust may need to file Form 1041.

Many providers offer compliance support, but ultimate responsibility rests with you as trustee.

Exit Strategies and Distributions

Eventually you'll access your Solo 401(k) wealth:

Distribution Options:

• Age 59½+: Penalty-free distributions (still taxable if Traditional, tax-free if Roth qualified)
• Age 73: RMDs required for Traditional and Roth 401(k)s
• In-kind distributions: Take property itself as a distribution
• Lump sum: Sell properties and distribute cash
• Systematic withdrawals: Take regular distributions while keeping properties

RMD Challenges: Real estate creates RMD complications because it's illiquid. Strategies:

• Build sufficient cash reserves from rental income
• Sell properties to generate required cash
• Take in-kind distribution of property
• Roll Roth 401(k) to Roth IRA before RMDs begin (eliminates RMDs)

Roth Rollover Strategy: Before age 73, roll Roth 401(k) funds to Roth IRA. This eliminates RMDs entirely and simplifies real estate ownership in retirement.

Advanced Strategies

Spousal Participation: If your spouse works in the business, they can participate in the Solo 401(k) with their own employee deferrals, potentially adding $23,500 more in contributions.

Partnership with Other Plans: Your Solo 401(k) can partner with your SDIRA, your spouse's retirement accounts, or third-party investors to purchase larger properties.

Fix-and-Flip: Use Solo 401(k) for house flipping. Buy distressed property, pay contractors for renovations, sell for profit—all within the plan. Be aware of potential UBIT on active business income.

Tenant-in-Common Ownership: Partner multiple 401(k)s or IRAs as tenants-in-common on one property, allowing pooled resources for larger deals.

Common Mistakes to Avoid

Using Disqualified Service Providers: Don't hire your son's construction company to renovate 401(k) property—that's a prohibited transaction.

Inadequate Reserves: Running out of cash for property expenses forces either prohibited self-funding or property neglect.

Commingling Funds: Mixing personal and 401(k) money is a fast track to disqualification.

Missing Form 5500: Failing to file when required triggers penalties of $250/day up to $150,000.

Personal Use: Staying at 401(k)-owned property "just one night" disqualifies the entire plan.

No Written Procedures: Operating informally without documented policies and procedures invites IRS challenge.

Frequently Asked Questions

Q: Can I have both a Solo 401(k) and contribute to an employer 401(k)? A: Yes, but the $23,500 employee deferral limit applies across all 401(k)s combined. Employer profit-sharing contributions can still bring you to the $70,000 total limit.

Q: What if I hire my first employee? A: You must either terminate the Solo 401(k) or transition to a full 401(k) plan that covers employees (more complex and expensive).

Q: Can my Solo 401(k) invest in my own business? A: No. You cannot use plan assets to invest in your own business or any entity you control—that's a prohibited transaction.

Q: Can I convert my existing IRA to a Solo 401(k)? A: You can roll IRA funds into a Solo 401(k), but it's taxable if rolling Traditional IRA to Roth 401(k). Traditional to Traditional is tax-free.

Q: What happens when I die? A: Your beneficiaries inherit the Solo 401(k). They have distribution options similar to inherited IRAs, though SECURE Act 10-year rules apply for most non-spouse beneficiaries.

Q: Can I invest in overseas real estate? A: Yes, but complexity increases significantly with foreign property ownership, currency exchange, foreign taxes, and reporting requirements.

Q: Is a Solo 401(k) protected from creditors? A: Generally yes under federal law (ERISA) and bankruptcy protection. State law governs non-bankruptcy creditor protection, which varies.

Q: Can I hold Bitcoin or cryptocurrency? A: Yes, if your plan documents allow it and you find a provider that supports crypto custody.

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A Solo 401(k) represents one of the most powerful tools available to self-employed individuals for building tax-advantaged retirement wealth through real estate. With contribution limits exceeding $70,000 annually, built-in checkbook control, and the ability to borrow from the plan, Solo 401(k)s offer advantages that Self-Directed IRAs simply can't match—if you qualify.

However, with great power comes great responsibility. Prohibited transaction rules remain strict, compliance requirements are real, and mistakes can be catastrophic. Success requires education, professional guidance, and meticulous record-keeping.

For self-employed real estate investors willing to navigate the rules properly, a Solo 401(k) can accelerate wealth building dramatically—transforming modest annual contributions into a multi-property real estate portfolio worth millions, all growing tax-advantaged and potentially providing tax-free retirement income for life.

The question isn't whether you can afford to set up a Solo 401(k)—it's whether you can afford not to.