THE ADVANTAGES OF USING AN LLC TO MAKE INVESTMENTS WITH A SOLO 401K PLAN

With a Solo 401k Plan, you as trustee of the Solo 401k Plan, will have "checkbook control" over the funds allowing you to make 401k Plan investments by simply writing a check. When making an investment with your Solo 401k Plan, you have the option of making the investment directly with your Solo 401k plan, or, alternatively, you can invest the funds in an entity, such as an LLC, which will be owned 100% by the Solo 401k plan to make the investment.

There are a number of advantages of using an LLC to make an investment using your Solo 401k Plan.

Limited Liability Protection: The LLC offers its members, in the case of a Solo 401k Plan, limited liability. Owners and members of the LLC are not liable for the debts, obligations, and liabilities of the LLC. Since, in most cases, your retirement account may be your most valuable asset, protecting them from attack from creditors is essential. By using an LLC, you would be able to shield all your 401k assets held outside the LLC from creditor attack. The following are several examples that illustrate the limited liability benefits of using an LLC to make a Solo 401k Plan investments:

Example 1: John has $200,000 in a Solo 401k plan and wants to purchase real estate. John establishes a new LLC that will be owned 100% by his Solo 401k Plan. John's Solo 401k Plan contributes the $200,00 to the new LLC and the LLC purchases the property. Each year the property generates $20,000 of rental income and the LLC distributes $12,000 back to the Solo 401k Plan tax-free (the LLC keeps $8,000 to help pay for property taxes, repairs, etc). After year 5, John has accumulated $80,000 of income in his Solo 401k Plan account (outside of the LLC). In year 6, an accident occurs on the property owned by the LLC and the LLC is sued. Unfortunately, John's insurance policy will not cover the entire claim. Because John has used an LLC to make the investment and not made the investment directly using the Solo 401k Plan, the $80,000 of 401k Plan assets held outside of the LLC will be shielded from creditor attack due to the limited liability feature of the LLC. If John had made the real estate investment directly using his Solo 401k Plan, and not using an LLC, his entire 401k retirement plan would have been subject to attack by creditors.

Example 2: John has $200,000 in a Solo 401k Plan and wants to buy real estate as well as invest in stocks. John establishes a new LLC that will be owned 100% by his Solo 401k Plan. John plans to use the LLC to make his real estate investment. John finds a property for $150,000 and contributes $160,000 to the new LLC to make the purchase. The new LLC purchases the property. John elects to make stock purchases directly from his Solo 401k Plan without using an LLC. In year 3, an accident occurs on the property owned by the LLC and the LLC is sued. Unfortunately, John's insurance policy will not cover the entire claim. Because John used an LLC to purchase the property and not made the investment directly using the 401k Plan, the $40,000 of 401k Plan assets used to purchase stock held outside of the LLC will be shielded from creditor attack due to the limited liability feature of the LLC. If John had made the real estate investment directly using his Solo 401k Plan, his entire 401k retirement plan would have been subject to attack by creditors.

Privacy: Along with limited liability protection, the LLC offers its owner(s) privacy, confidentiality, and discretion when making investments. Because most states do not require the name of the member(s) of the LLC to be made publicly available when forming an LLC, by using an LLC, the 401k Plan participant can shield its identity when making an investment. Whereas, if the Solo 401k Plan made the investment directly (without using an LLV), the Solo 401k Plan's name would be included on all the real estate and title related documents and would be publicly available. In other words, the name of the Solo 401(k) Plan, which typically involves the name of the business or sole proprietorship adopting the Plan would be included on all public documents, whereas, in the case of an LLC, only the name of the LLC would be included. What this means is that anyone looking to identify the owner(s) of the property will have a very difficult time finding it.

Example 1: John has $300,000 in a Solo 401k Plan and wants to buy real estate. John establishes a new LLC that will be owned 100% by his Solo 401k Plan. John uses a generic name for the LLC, which does not reference his name or the name of his business. John's Solo 401k Plan contributes the $300,00 to the new LLC and the LLC purchases the property. John has had some financial difficulties and owes several people money. Because John has used an LLC to make his real estate investment, the creditors will have an extremely difficult time identifying John's 401k Plan assets for potential attack.

Example 2: John has $300,000 in a Solo 401k Plan and wants to buy an apartment building. John establishes a new LLC that will be owned 100% by his Solo 401k Plan. John uses a generic name for the LLC, which does not reference his name or the name of his business. John's Solo 401k Plan contributes the $300,00 to the new LLC and the LLC purchases the building. The apartment building has 5 units and the tenants will pay their rent by writing monthly rental checks. By using an LLC, John is able to shelter from the tenants the identity of the owner of the building - his Solo 401k Plan. This way, a disgruntled tenant would have a far more difficult time identifying the owner of the building for litigation or other purposes. In addition, any creditors of John personally would also have a difficult time identifying building as an asset associated with John.

By using an LLC to make a Solo 401k plan investment, you will benefit from limited liability protection and privacy protection when making Solo 401k plan investments.

To learn more about the benefits of using an LLC to make a Solo 401k plan investment please contact one of our Solo 401(k) Plan Experts at 800-472-0646.