The Individual 401K – The Solo 401K Solution for the Self-Employed

July 20th, 2011

A self-directed 401k, or a solo 401K Plan is also often referred to as an individual 401k. The individual 401k plan was created by the IRS in the early 1980s to provide the self-employed and small business owners with a qualified retirement plan.

An Individual 401K Plan is perfect for any sole proprietor, consultant, or independent contractor, such as a realtor, doctor, accountant, attorney, dentist, or sales agent. The Individual 401K Plan can be adopted by a sole proprietorship, LLC, Partnership, or Corporation.

The following are some of the primary advantages of adopting an Individual 401K Plan.

High Contributions: With an Individual 401K Plan, a plan participant who has sufficient income can make annual contributions up to $49,000 annually with an additional $5,500 catch up contribution for those over age 50. Unlike a Traditional IRA, which only allows an individual to make a $5,000 contribution ($6,000 contribution if the individual is over the age of 50), an individual 401K Plan allows for significantly higher annual contributions. In addition, the contributions can be in pre-tax or Roth (after-tax).

Loan for any Purpose: With an Individual 401K Plan, a plan participant is eligible to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying personal expenses such as credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five-year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate). There is no pre-payment penalty.
No IRA Custodian is Required: One of the most popular aspects of the Individual 401K Plan is that it does not require the participant to hire a bank or trust company to serve as trustee of the Plan. Unlike, an IRA which requires a financial institution to serve as trustee and custodian of the IRA, in the case of a Individual 401K Plan, the plan account can be opened at any local bank or credit union and the plan participant can serve as trustee of the Plan.

“Total Control” With an a “Checkbook Control” Individual 401K Plan, the plan participant (you) to gain “checkbook control” over your retirement funds. In essence, all assets of the Individual 401K Plan will be under the sole authority of the 401k participant. An Individual 401K plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself. With an Individual 401K Plan, making a 401K Plan investment is as simple as writing a check.

Investment Opportunity: With an Individual 401K, you will be able to invest in almost any type of investment opportunity that you discover, including: 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; you’re only limit is your imagination. The income and gains from these investments will flow back into your Individual 401K Plan tax-free!

Use Nonrecourse Leverage without Penalty: Unlike an IRA which is subject to tax on using nonrecourse leverage, Internal Revenue Code Section 514(c)(9) provides an exemption, allowing an Individual 401K plan to use nonrecourse leverage to make a real estate acquisition without tax or penalty.

Easy Plan Administration: The Individual 401K Plan is simple and easy to administer. There is generally no annual filing requirement unless the assets in your Individual 401K Plan exceeds $250,000, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

IRA Financial Group will take care of setting up your entire Individual 401K Plan. The whole process can be handled by phone, email, fax, or mail and typically takes between 2-10 days to complete, the timing largely depending on the time it takes your current retirement asset custodian to move the funds to the new Individual 401K Plan account. Our tax and ERISA attorneys are on site greatly reducing the set-up time and cost. Most importantly, each client of the IRA Financial Group is assigned a tax attorney to help with the establishment of the Self Directed 401K Plan.
For additional information on the Individual 401K Plan, please contact us at 800-472-0646.