Last Updated on February 7, 2020
We share the top 7 Solo 401k investments you can make with the self-directed retirement plan. At IRA Financial, we do not tell our clients what investments to purchase, or offer an investment advice. We administer your retirement plan and work to educate you on the investments you can make with a self-directed retirement plan. These Solo 401k investments are not for everyone and due diligence is required before getting into an investment.
Solo 401k Advantage
A Solo 401k Plan offers one the ability to use his or her retirement funds to make almost any type of 401(k) alternate investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.
Solo 401k Investments
The following are some examples of types of 401(k) alternate investments that can be made with your Solo 401k Plan:
- Residential or commercial real estate
- Domestic of foreign real estate
- Raw land
- Foreclosure property
- Mortgage pools
- Private loans
- Tax liens
- Private businesses
- Limited Liability Companies
- Limited Liability Partnerships
- Private placements
- Precious metals and certain coins
- Stocks, bonds, mutual funds
- Foreign currencies
The IRS permits using a Solo 401k to purchase real estate or raw land. Since you are the trustee of the 401(k) Plan, making a real estate investment is as simple as writing a check from your 401(k) Plan bank account. The advantage of purchasing real estate with your Solo 401k Plan is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401k Plan, all gains are tax-free.
For example, if you purchased a piece of property with your Solo 401k Plan for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.
The IRS permits the purchase of tax liens and tax deeds with a Solo 401k Plan. By using a Solo 401k Plan to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401k Plan, all gains are tax-free.
More importantly, with a Solo 401k Plan, you, as trustee of the 401(k) Plan, will have “checkbook control” over your retirement funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!
Loans & Notes
The IRS permits using 401(k) funds to make loans or purchase notes from third parties. By using a Solo 401k Plan to make loans or purchase notes from third-parties, all interest payments received would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401k Plan, all gains are tax-free.
For example, if you used a Solo 401k to loan money to a friend, all interest received would flow back into your 401(k) Plan tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.
With a Solo 401k you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using 401(k) funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512. The retirement tax professionals at the IRA Financial Group will work with you to develop the most tax-efficient structure for using your Solo 401k Plan to invest in a private business.
Precious Metals & Coins
Our Solo 401k Plan documents allow for investments into IRS approved precious metals and coins (bullion), as defined in Internal Revenue Code Section 4975. The advantage of using a Solo 401k Plan to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the IRS approved precious metals and/or coin (bullion) should be held at an approved depository or U.S. Bank, as defined under Internal Revenue Code Section 408(a).
The IRS does not prevent the use of 401(k) funds to purchase foreign currencies, including Iraqi Dinars. In fact, our Solo 401k Plan documents permit the purchase of foreign currencies. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.
By using a Solo 401k to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401k Plan, all gains are tax-free.
Stocks, Bonds, Mutual Funds, CDs
In addition to 401(k) alternate investments such as real estate, a Solo 401k may purchase stock, bonds, mutual funds, and CDs. The advantage of using the Plan with “Checkbook Control” is that you are not limited to just making these types of investments. With a Solo 401k Plan with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!