Solo 401k Advantages are appealing for many self employed contractors and owners of small businesses. No matter what type of businesses they set up, such as sole proprietorship, LLC, corporation, or partnership, the owner(s) will be qualify for a Solo 401k account as long as there is no other full time employees.
With a Solo 401k plan, plan holders will enjoy many similar advantages to a Self-Direccted IRA LLC (or Checkbook IRA), but without the extra steps of having a custodian or forming an LLC.
What draws investors to Solo 401k is that it is specifically designed for small business entities with only owner(s). Therefore, the plan offers cost-effective and tax-efficient investment solutions just like a Self-Directed IRA plan, plus some extra benefits.
In the end, what makes Solo 401k the ideal plan for self employed business owners?
Solo 401k Advantages Include:
As the trustee of the Solo 401k account, plan participant will have “checkbook control” of the assets. You can now make investments as easily as signing a check. Also, you will not have to look for a trust company or any other institution to act as your trustee. The lack of a third party custodian offers multiple benefits. First, all assets will be completely in the hands of the account holders, giving them total power over their financial future. Secondly, account holders will save on custodian fees and be able to act fast without waiting for a custodian’s consent. No additional cost or delay means you will have more funds and more time to catch that lucrative opportunity.
High Contribution Limits
A conventional IRA account allows you to contribute only a maximum of $5,500 and a $1,000 “catch up” allowance for those over 50 years old. Solo 401k, on the other hand, offers a high contribution limits of up to $59,000 annually. If your spouse is also generating income from the business, he or she can also make contributions. The high contribution limit is one of the biggest advantages of Solo 401k!
“The wise man saves for the future, but the foolish man spends whatever he gets.”
- Proverbs 21:20
After 401k contribution rules took effect in 2016, participants less than 50 years of age can contribute up to $18,000 as an employee salary deferral, either in pre-tax or after-tax amount in a Roth sub-account. Also as the employer in the business, the account holder can also choose to make profit-sharing contribution of up to 25% (or 20% for a sole proprietorship or single member LLC). The combination of salary deferral and profit sharing contributions cannot exceed $53,000.
Those who are at least 50 years old are allowed a catch up contribution, bringing their total employee deferral contribution to a maximum of $24,000. Combined with 25% profit sharing contribution (20% for a sole proprietorship or single member LLC), plan participants can contribute as much as $59,000 a year.
While the contribution limit allows you to save a large part of your yearly income, the decision to contribute to a Solo 401k is complete at your discretion. You can contribute up to the maximum limit, or as little as you want, even suspending contribution in case of financial needs. This means you are allowed to contribute a large amount to your retirement savings, but it is not at all a mandatory.
A Solo 401k account holder is able to invest in real estate, including rental homes, commercial buildings, tax deeds, tax liens, foreclosure properties, and raw land.
“Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”
- Ecclesiastes 11:2
The options also include private businesses, precious metals, and hard money lending, beside the traditional option of stock and bond. That’s virtually all the investment choices available. All income from your investments will be directed back into your Solo 401k Plan without tax. Making investment decision is also simple: you can just write a check to fund the transaction without asking for consent from a third party.
IRA plan holders of high income level are not allowed to contribute to a Roth IRA. Solo 401k Plans, however, can have a Roth Sub-Account and you can contribute without any income restriction. The sub-account allows you to make after tax contribution in a significantly larger amounts than with an IRA.
While with an IRA, borrowing money from the account is absolutely out of question, Solo 401k actually allows you to take out a loan of up to $50,000 or 50% of the account value, whichever is less, at a low interest rate. (Prime interest rate plus 1%). Therefore, plan participant will always have access to as much as $50,000 in their retirement fund and for any reason, including personal debts or their own business.
If an IRA account uses mortgage to leverage their real estate investment, they will be charged with Unrelated Debt Financed Income (UDFI) – a type of Unrelated Business Taxable Income (UBTI) of about 35%. With a Solo 401k plan, however, you can make leveraged investments without triggering the UBTI tax charges. This is a major advantage for real estate investors.
Solo 401k plan permit rollovers from other retirement plans like a traditional IRA, SEP IRA, or even a previous employer’s 401k, 457 or 403B. Therefore, you simply can rollover your retirement funds from an IRA or a qualified plan into your new Solo 401k Plan. There is only one exception: you cannot rollover fund from a Roth IRA account.
Solo 401k plans are simple to set up and manage. You will not have to file annual return unless the plan has more than $250,000 in assets. In that case, you will need to file form 5500-EZ with the IRS.
Please contact one of our Retirement Account Experts at 949-228-9394 for more information.