The Individual 401K Plan

July 8th, 2011

An Individual 401K Plan, also known as a Solo 401K Plan, offers a self employed business owner (i.e. accountant, attorney, doctor, dentist, etc) the ability to use their retirement funds to make almost any type of investment tax-free, including real estate on their own without requiring custodian consent. An individual 401K Plan can be adopted by any business as long as that business has no full-time employees other than the owner and his/her spouse, an Individual 401K Plan can be established. The Individual 401K Plan can be adopted by a sole proprietorship, LLC, Partnership, or Corporation.

There are many reasons why the Individual 401K Plan is considered the most attractive retirement solution for a sole proprietorship or small business owner with no employees.

High Contributions: With an Individual 401K Plan, a plan participant can make annual contributions up to $49,000 annually with an additional $5,500 catch up contribution for those over age 50.

Tax-Free 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.

“Total Control”: One of the most popular aspects of the Individual 401K Plan is that the Plan participant can serve as trustee of the Plan providing that individual with checkbook control over his or her retirement funds. With an Individual 401K Plan, making an investment is as simple as writing a check. An Individual 401K Plan 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. An Individual 401K plan allows the Plan participant to act quickly when the right investment opportunity presents itself.

Investment Opportunities: 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 Tax-Free: When an IRA buys real estate that is leveraged with nonrecourse mortgage financing, it creates Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) on which taxes must be paid pursuant to Internal Revenue Code Section 514. An Individual 401K plan is generally exempt from UDFI. In other words, unlike an IRA, Internal Revenue Code Section 514(c)(9), allows an Individual 401K plan to use nonrecourse leverage to make a real estate acquisition without tax or penalty.

Roth Contributions & Conversions: The Individual 401K Plan contains a built in Roth sub-account which can be contributed to without any income restrictions. An Individual 401K Plan will allow you to make pre-tax and/or after-tax (Roth) employee deferral contributions to your Plan. In addition, the Individual 401K Plans allows for the conversion of pre-tax 401K funds to an after-tax Roth sub-account contained in the Individual 401K Plan.

Easy Plan Administration: The Individual 401K Plan is easy to operate and effortless 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.