A Solo 401(k) Plan, also called an Individual 401(k) Plan offers a self-employed business owner the ability to use their retirement funds to make almost any type of investment tax-free. This includes real estate 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 401K Plan.
An Individual 401(k) Plan is perfect for any sole proprietor, consultant, or independent contractor, such as a realtor, doctor, accountant, attorney, dentist, or sales agent. A sole proprietorship, LLC, Partnership, or Corporation can adopt the Individual 401(k) Plan.
So there are many reasons why the Individual 401(k) Plan is considered the most attractive retirement solution for the self-employed.
Under the 2019 Solo 401(k) contribution rules, a participant under the age of 50 can make a maximum employee deferral contribution in the amount of $19,000. 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. This includes the employee deferral of $56,000.
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $25,000. 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. This includes the employee deferral of $62,000.
Tax-Free Loan for any Purpose
With an Individual 401(k) Plan, a participant is 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, 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. 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 the participant 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, the plan account can be opened 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. With an Individual 401(k) Plan, making a 401(k) Plan investment is as simple as writing a check.
Unlocking A World of Investment 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
Your only limit is your imagination. 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.
After-Tax (Roth) Contributions
The Individual 401(k) Plan contains a built in Roth sub-account which can contribute 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.
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).
Roth 401K Conversion
The Individual 401(k) Plans 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 converts.
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 401K plans are given full bankruptcy exemption.
Outside of bankruptcy, state law will govern whether Individual Solo 401K Plan assets are safe from creditors. Most states will provide protection for Individual Solo 401K Plan assets from creditors outside of the bankruptcy context.
IRA Financial Group will take care of setting up your entire Individual 401K Plan. We can handle the process by phone, email, fax, or mail. This typically takes between 2-10 days to complete, however the 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 401K Plan.
Did you know?
You can serve as the Plan Administrator of your Individual 401(k) Plan.