A Solo 401(k) Plan, also called a Self-Directed 401(k), offers a self employed business owner the ability to use their retirement funds many types of investments. This is all done tax-free. Investments are done on their own without custodian consent. Additionally, a Self-Directed 401(k) Plan will allow you to make high contributions to the Plan. Up to $55,000 for plan participants under the age of 50 and $61,000 for plan participants over the age of 50. It also allows you to borrow to $50,000 for any reason.
Advantages of Using a Self-Directed 401(k)
The Self-Directed Solo 401(k) Plan is very popular for small business owners. The reason for this is, the IRS designs it specifically for small business owners. In contrast to other 401(k) Plans, IRA Financial Group’s Self-Directed 401(k) Plan specifically allows plan participants to diversify their retirement portfolio. This occurs with traditional as well as non-traditional investments such as real estate and precious metals.
The Individual 401K Plan can be adopted by a sole proprietorship, LLC, Partnership, or Corporation.
There are a number of features that make the Self-Directed 401K Plan so appealing for self -employed business owners.
1. High Contribution Limits
Under the 2018 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum of $55,000.
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,500. Participants can make this amount pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum. This includes the employee deferral of $61,000.
2. Tax-Free Loan
When you have a Self-Directed 401(k) Plan, you become eligible to borrow up to $50,000 or 50% of your account value. Whichever is less. You can borrow it for any purpose, including paying personal expenses such as credit card bills, mortgage payments, or business investments. However you must pay the loan back over a five-year period. You can do this at a minimum prime interest rate (you have the option of selecting a higher interest rate). There is no pre-payment penalty.
3. “Checkbook Control”
One of the most popular aspects of the Self-Directed 401(k) Plan is that it doesn’t require you to hire a bank or trust company to serve as trustee. In contrast, an IRA requires a financial institution to serve as trustee and custodian of the IRA. In the case of a Self-Directed 401K Plan, you can open the plan account at any local bank or credit union and the plan participant can serve as trustee of the Self-Directed 401(k).
This flexibility allows you to have “checkbook control” over your retirement funds. In essence, all assets of the Self-Directed 401(k) Plan will be under the sole authority of the 401k participant. This means there are no more expenses and delays that come with an IRA custodian. So this means that you can act on any investment opportunity that presents itself. And all you have to do is write a check.
4. A World of Investment Opportunities
With a Self-Directed 401K, you can invest in almost any type of investment opportunity that you discover. This includes:
- Real Estate (rentals, foreclosures, raw land, tax liens etc.)
- Private Businesses, Precious Metals
- Hard Money
- Peer to Peer Lending as well as stock and mutual funds
The income and gains from these investments will flow back into your Self-Directed 401(k) Plan tax-free!
5. Use Leverage Tax-Free
When an IRA buys real estate that is leveraged with nonrecourse mortgage financing, it creates Unrelated Debt Financed Income. This is a type of Unrelated Business Taxable Income. In this case, taxes must be paid pursuant to Internal Revenue Code Section 514. A Self-Directed 401K plan is generally exempt from UDFI. So unlike an IRA, Internal Revenue Code Section 514(c)(9) allows a Self-Directed 401(k) plan to use nonrecourse leverage to make a real estate acquisition without tax or penalty.
6. Roth Contributions
The Self-Directed 401(k) Plan contains a built in Roth sub-account which can you can contribute to without income restrictions. A Self-Directed 401(k) Plan allows you to make pre-tax and/or after-tax (Roth) employee deferral contributions to your Plan.
7. Easy Administration
The Self-Directed 401(k) Plan is easy to operate and effortless to administer. There is generally no annual filing requirement unless the assets in your Self-Directed 401K Plan exceeds $250,000. In which case, you will need to file a short information return with the IRS (Form 5500-EZ).
8. Roth Conversion
The Self-Directed 401(k) Plans allow for the conversion of pre-tax 401(k) funds to an after-tax Roth sub-account. However, the 401(k) Plan participant must pay income tax on the amount converted.
9. Offset the Cost of Your Plan with a Tax Deduction
By paying for your Solo 401(k) with business funds, you can be eligible to claim a deduction for the cost of the plan. And this includes annual maintenance fees. The deduction for the cost associated with the Solo 401(k) Plan and ongoing maintenance helps reduce your business’s income tax liability. In turn, this will offset the cost of adopting a self-directed Solo 401(k) Plan.
The retirement tax professionals at the IRA Financial Group will help you take advantage of the available business tax deduction for adopting a Solo 401(k) Plan.
10. Asset & Creditor Protection
In the case of a bankruptcy, the general exemption found in section 522 of the Bankruptcy Code, 11 U.S.C. §522, provides an unlimited exemption for retirement assets exempt from taxation.
Thus, ERISA plans as well as Self-Directed 401K plans receive full bankruptcy exemption. State law governs protection for Self-Directed Solo 401K Plan from creditors – outside of bankruptcy. Most states will provide protection for Self-Directed Solo 401K Plan assets from creditors outside of the bankruptcy context.
IRA Financial Group can take care of setting up your entire Self-Directed 401(k) Plan. We can handle the process a number of ways: by phone, email, fax, or mail. It can take between 2-10 days to complete, but the timing largely depends on the time it takes your current retirement asset custodian to move funds to the new Self-Directed 401(k) Plan account. Our tax and ERISA professionals are on-site to reduce the set-up time and cost. Each client a retirement tax professional to help with the establishment of the Self-Directed 401(k) Plan.
Did you know?
You can serve as trustee of your Solo 401(k) Plan.