A Solo 401(k) Plan, also called an Individual 401(k) Plan offers a self-employed business owner the ability to use his or her retirement funds to make almost any type of investment tax-free and without custodian consent.
As long as a business exists with no full-time employees other than the owner and his/her spouse, owners can establish an individual 401(k) Plan.
An Individual 401(k) Plan is perfect for:
- Sole proprietors
- Independent contractors, such as a realtor, doctor, accountant, attorney, dentist, or sales agent.
- A sole proprietorship, LLC, Partnership or Corporation
So there are many reasons why the Individual 401(k) Plan is considered the most attractive retirement solution for the self-employed. Additionally, it’s beneficial for small business owners with no full-time employees.
Under the 2019 Solo 401(k) contribution rules, if you’re under the age of 50 , you can make a maximum employee deferral contribution in the amount of $19,000.
You can make this in pre-tax, or in an individual Roth 401(k) plan (after-tax).
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 $56,000.
For plan participants over the age of 50, you can make a maximum employee deferral contribution in the amount of $25,000. Again, you can make this in pre-tax or in an individual 401(k) plan, which is after-tax.
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 $62,000.
Tax-Free Loan for any Purpose
With an Individual 401(k) Plan, you’re eligible to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose. This includes paying personal expenses such as:
- Credit card bills
- Mortgage payments
- Personal or business investments
- A car
Virtually, you can use it for anything.
You must pay the loan back over a five-year period at least quarterly at a minimum prime interest rate. Notably, you have the option of selecting a higher interest rate. There is no pre-payment penalty.
True “Checkbook Control”
One of the most popular aspects of the Individual 401(k) Plan is that it does not require you to hire a bank or trust company to serve as trustee of the Plan.
This differs from an IRA, which requires a financial institution to serve as trustee and custodian of the IRA. See, in the case of a Individual 401(k) Plan, you can open the plan account at any local bank or credit union and the plan participant can serve as trustee of the Plan.
This flexibility allows the plan participant (you) to gain “checkbook control” over your retirement funds.
In essence, all assets of the Individual 401(k) Plan will be under the sole authority of the 401(k) participant.
An Individual 401(k) plan allows you to eliminate the expense and delays that come with an IRA custodian. This enables you to act quickly when the right investment opportunity presents itself.
Unlocking a World of Opportunity
With an Individual 401(k), 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
The income and gains from these investments will flow back into your Individual 401(k) 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 401(k) plan is generally exempt from UDFI. In other words, unlike an IRA, Internal Revenue Code Section 514(c)(9), allows an Individual 401(k) plan to use nonrecourse leverage to make a real estate acquisition without tax or penalty.
Individual Roth 401(k) Contributions
The Individual 401(k) Plan contains a built in Roth sub-account. You can contribute to a Individual Roth 401(k) without any income restrictions.
An Individual 401(k) Plan will allow you to make pre-tax and/or after-tax (Roth) employee deferral contributions to your Plan.
The Roth 401(k), as many IRA holders know, is the equivalent of a Roth IRA, where you contribute after-tax funds. As a result, you don’t have to pay taxes at the time you take out a distribution.
An Individual Roth 401(k) is exactly like a Roth 401(k), however it is for individuals who earn self-employment income.
Individual Roth 401(k) Conversion
The Individual 401(k) Plan allows the conversion of pre-tax 401K funds to an after-tax Roth sub-account in the Individual 401(k) Plan. However, the Individual 401(k) Plan participant must pay income tax on the amount that he or she converts.
Simple Plan Administration
The Individual 401(k) Plan is easy to operate and effortless to administer. There is generally no annual filing requirement unless the assets in your Individual 401(k) Plan exceeds $250,000. In that case, you will need to file a short information return with the IRS (Form 5500-EZ).
Offset the Cost of Your Plan with a Tax Deduction
By paying for your Solo 401(k) with business funds, you will be eligible to claim a deduction for the cost of the plan, including annual maintenance fees.
The deduction for the cost associated with the Solo 401(k) Plan and ongoing maintenance will help reduce your business’s income tax liability. In effect, 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.
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 for Section 401(a) (tax qualified retirement plans—pensions, profit-sharing and section 401(k) plans). Thus, ERISA qualified plans as well as Self-Directed 401(k) plans are given full bankruptcy exemption.
Outside of bankruptcy, state law will govern whether Individual Solo 401(k) Plan assets are safe from creditors. Most states will provide protection for Individual Solo 401(k) Plan assets from creditors outside of the bankruptcy context.
Your Individual 401(k) At IRA Financial Group
IRA Financial Group will take care of setting up your entire Individual 401(k) Plan. We can handle the process by phone, email, fax, or mail. This typically takes between 2-10 days to complete. Timing largely depends on your current retirement asset custodian and how quickly they move funds to the new Individual 401(k) Plan account.
Our tax and ERISA professionals are on-site greatly reducing the setup time and cost. Most importantly, each client of the IRA Financial Group receives a retirement tax professional to help with the establishment of the Self-Directed 401(k) Plan.
Get in Touch
Do you still have questions regarding the Individual 401(k) retirement plan? Contact IRA Financial Group directly at 800-472-0646. Or you can fill out the form to get in touch with our IRA specialists to answer any questions.
Did you know?
You can serve as the Plan Administrator of your Individual 401(k) Plan.