A Solo 401(k) plan provides the investors with the ability to make almost any type of investment using his or her retirement funds. As trustee of the Solo 401(k) plan, you can make investments (traditional and alternative assets) without the consent of a custodian.
Types of Solo 401(k) Investments You Can Make
As new investment options emerge, the IRS must continuously update the tax code. As a result, the IRS only describes what a retirement account cannot invest in, not the investments you can make. Except for collectibles and prohibited transactions under IRS 4975, your Solo 401(k) can invest in virtually any type of investment.
The following are a list of popular investments the IRS permits you to make with your Solo 401(k) retirement funds.
Real Estate
You can use your Solo 401(k) to purchase real estate or raw land. Since you are the trustee of the 401(k) Plan, you can make an investment simply by writing a check from the 401(k)-bank account or wiring the funds. The advantage of purchasing real estate with your Solo 401(k) Plan is that all gains are tax-deferred until a distribution is taken. Pre-tax 401(k) distributions are not required until you (the Plan Participant) turn 70 1/2. In the case of a Roth Solo 401(k) Plan, all gains are tax-free.
Because of the tax-deferred or tax-free gains, if you purchase a piece of property with your Solo 401(k) Plan for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation is generally tax-free. Whereas, if you used personal funds (non-retirement funds) to purchase property, the gain will be subject to federal income tax and in most cases state income tax.
Tax Liens
You can purchase tax deeds and tax liens with a Solo 401(k) Plan. By using a Solo 401(k) Plan to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken. Again, pre-tax 401(k) distributions are not required until you turn 70 1/2. Gains are tax-free in the case of a Roth Solo 401(k) Plan.
As trustee of the 401(k) Plan, you 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
You can purchase loans and notes from third parties with your plan. By using a Solo 401(k) to make loans or purchase notes from third-parties, all interest payments received are tax-deferred until a distribution is taken, but a pre-tax 401(k) distribution is not required until you turn 70 ½. Gains for a Roth Solo 401(k) are tax-free at the time you take a distribution.
For example, if you use a Solo 401(k), also known as the individual 401(k), to loan money to a friend, all interest flows back into your 401(k) Plan tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest will be subject to federal and in most cases state income tax.
Private Businesses
With a Solo 401(k) 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 401(k) Plan to invest in a private business.
Cryptocurrency
The IRS treats cryptocurrency, such as Bitcoin, as property and not currency. This provides a potential boost to investors by the IRS. However, the IRS is also keeping extensive record-keeping rules and significant taxes on the use of crypto.
With IRA Financial Group’s Self-Directed IRA LLC solution, you can use traditional IRA or Roth IRA funds to buy cryptocurrency tax-free. IRA Financial Group’s Self-Directed IRA LLC is an IRS approved structure that allows you to use your retirement funds to make crypto and other investments tax-free and without custodian consent. The Self-Directed IRA LLC involves the establishment of a limited liability company (LLC) that the IRA owns (care of the IRA custodian) and the IRA holder or any third-party manages.
As manager of the IRA LLC, the IRA owner will have control over the IRA assets to make traditional as well as non-traditional investments.
Precious Metals & Coins
There are certain precious metals and coins that you can invest in, which can be found in Internal Revenue Code Section 4975. When you use a Solo 401(k) Plan for the purchase of precious metals and/or coins, the value of the asset generally keeps up with (or exceeds) inflation rates better than other investments. Always hold IRS approved precious metals and/or coins (bullion) at an approved depositor or U.S. bank, as defined under Internal Revenue Code Section 408(a).
Stocks, Bonds, Mutual Funds, CDs
In addition to alternative asset investments (non-traditional), you still have the option of making traditional investments with your Solo 401(k) plan. This includes the purchase of stock, bonds, mutual funds, CDs, etc.
