A 401(k) Plan is an IRS approved qualified retirement plan. 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 offers most of the characteristics of the self-directed IRA LLC, including having the ability to make almost any type of investments, including real estate.
The solo 401(k) plan may be used by any individual who is already a business owner or who will be establishing a business and does not have, or plan to have, full-time employees. The solo 401(k) plan is very popular for real estate investors since most are self-employed or have a business with no full-time employees.
The solo 401(k) Plan is the most tax-advantageous retirement plan available because of its very high annual contribution limits, $50,000 loan feature, and the ability to buy real estate using leverage without triggering a tax. The following are the three (3) main reasons why real estate investors are going crazy to establish self-directed solo 401(k) plans:
- Put Away Up to $61,000 a Year in Pre-Tax or Roth: While an IRA only allows a $5,500 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), the solo 401(k) annual contribution limit is $55,000 for 2018 with an additional $6,000 catch-up contribution for those over age 50. In addition, if your spouse generates compensation from the business, he or she can also make high contributions to the Plan.Under the 2018 solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,500. 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, including the employee deferral, of $55,000.For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,500. 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, including the employee deferral, of $61,000.
- Borrow Up to $50,000 Tax-Free & Use For Any Purpose: While an IRA offers no participant loan feature, the solo 401(k) plan allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose at a low interest rate (the lowest interest rate is Prime which is 4.75% as of 5/1/18). This offers a solo 401(k) Plan participant the ability to access up to $50,000 for use for any purpose, including paying personal debt or funding a business.
- Use Leverage to Buy Real Estate with No Tax: Like the Self-Directed IRA LLC structure, the solo 401(k) Plan offers participants the ability to invest in real estate tax-free! All income and gains generated by the investment will flow back to the 401(k) Plan tax-free!
In addition, in the case of an IRA using non-recourse debt to finance a real estate purchase (only non-recourse debt is permitted as recourse debt associated with an IRA investment would trigger a prohibited transaction), income or gains generally from the investment would trigger a penalty tax called the Unrelated Debt Financed Income (UDFI) tax. UDFI is a type of unrelated business taxable income which if triggered could subject the IRA too close to a 40% tax for 2018. However, a solo 401(k) Plan using non-recourse financing for a real estate investment is exempt from the UDFI tax (Internal Revenue Code Section 514(c)(9).
IRA Financial Group’s solo 401(k) plan is unique and so popular because it is designed explicitly for small, owner-only business. There are many features of the IRA Financial Group’s solo 401(k) plan that make it so appealing for small business owners.