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Everything you need to know about the Solo 401(k).
As the name implies, the Solo 401(k) plan is an IRS approved, qualified 401(k) plan designed for a self-employed individual or the sole owner-employee of a corporation. The Solo 401(k) plan is the most popular retirement plan for the self-employed.
The Solo 401(k) plan is the best retirement plan for the self-employed or small business owner with no full-time employees because it is easy to set-up, operate, and administer. The business owner can serve as trustee of the plan and have total investment control over plan assets.
With a Solo 401(k) plan, the plan documents dictate the type of options you will have in your plan. For example, with a Self-Directed Solo 401(k) plan , you would be able to take advantage of all available plan options.
A Roth Solo 401(k) allows you to make almost any type of investment tax-free. This includes real estate, tax liens, precious metals and more. You can also continue to make traditional investments, like stocks, bonds and mutual funds. When you reach age 59 1/2, you’ll have the ability to live off your Roth 401(k) assets without having to pay tax.
The Solo 401(k) plan offers very flexible contribution options, including pretax, after-tax, and Roth. In addition, there are many important rules that dictate how one can gain access to funds from a 401k) plan through distribution and/or a tax-free loan.
For 2023, a Solo 401(k) plan will allow one to make high annual contributions of up to $66,000 or $73,500 if you are age 50 or older in pretax, after-tax, or Roth.
Pursuant to IRC Section 72(p), a Solo 401(k) plan loan feature allows one to borrow the lesser of $50,000 or 50% of their account value and use the funds for any purpose. The loan is a five-year loan and payments must be paid quarterly using the “Prime” interest rate, as per the WSJ.
The advantage of making after-tax contributions and employing the “Mega Roth” strategy versus a typical mix of employee deferral and profit sharing contribution is that you can make a dollar for dollar contribution of up to $66,000 or $73,500 for 2023 and convert all the funds to a Roth IRA without tax.
With the Solo 401(k), you can use your retirement funds to make almost any type of alternative asset investment, such as: real estate, investment funds, private businesses, Bitcoin, gold and hard money loans.
Most Solo 401(k) plan investments are exempt from the Unrelated Business Taxable Income (UBTI) tax. Some examples of exempt type of income include: interest and rental income. However, there are types of income that could subject a Solo 401(k) to the UBTI tax.
The Internal Revenue Code does not describe what a Solo 401(k) plan can invest in, only what it cannot invest in. Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions.
Pursuant to IRC 514(c)(9), a Solo 401(k) plan can use a non-recourse loan to buy real estate without triggering the UBTI tax. In other words, a Solo 401(k) plan real estate investor can leverage his or her assets and generate tax-deferred gains without any tax.
For most Americans, their retirement accounts are their largest source of savings. As a result, Solo 401(k) plans are generally afforded strong protection from federal bankruptcy and state creditor protection outside of bankruptcy.