Individual 401 k: Shelter More of Your Income
The Individual 401 k plan is uniquely designed for small owner-only businesses. It offers powerful features that are not found in conventional IRAs or 401(k)s. As a flexible and tax-efficient retirement plan, it opens up a world of unlimited investment opportunity. Use your Individual 401k to invest in real estate, notes, tax deeds, or tax liens, to name a few. IRS rules allow you to function as both employer and employee in the Solo 401k Plan, and that allows you to contribute more to the plan than you could to a SEP IRA.
Take a look at some of the features of Solo 401k Plans that make it a popular choice among self-employed business owners.
Checkbook control without custodian fees
In a Solo 401(k) Plan, you serve as trustee, which gives you “checkbook control” over the plan’s assets. Making an investment with your plan is as easy as writing a check.
This eliminates the expenses and delays associated with a custodian. You can act quickly when the right investment opportunity presents itself.
The Solo 401k does not require the participant to hire a bank or trust company to serve as trustee. This allows you, the participant, to serve in the trustee role. This means that all assets of the Solo 401(k) trust are under the sole authority of the Solo 401(k) participant. A Solo 401(k) plan allows you to eliminate the expenses and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.
High contribution limits of the Individual 401k
The Individual 401k contributions are much higher than the IRA. At nearly 10 times the IRA contribution limit, the Individual 401k gives much more room to shelter your income from taxes. If your spouse is employed by the business, he or she can also make their own contributions to the plan.
Contributions to the 401k are also completely discretionary. While you always have the option to contribute as much as legally possible, you can also reduce or suspend plan contributions as necessary. In other words, you have the ability to make contributions to your Individual 401 k plan, but are not required to do so.
Roth sub-account
The Solo 401k has a built-in Roth sub-account, which gives you the ability to make Roth contributions to the plan. These contributions are significantly greater than those of an IRA, and there are no income restrictions as with a Roth IRA. The Roth sub-account feature allows your investments to grow tax-free.
Individual 401 k loan feature
The Individual 401 k allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose. The plan participant can use the funds to pay personal debt or fund a business. In contrast, an IRA does not allow a participant to borrow from the account.
Exempt from UDFI
When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (“UDFI”). This is a type of Unrelated Business Taxable Income (also known as “UBTI”) on which taxes must be paid. The UBTI tax is approximately 35%.
With the Individual 401k plan, you can use leverage without being subject to the UDFI rules and UBTI tax. This exemption provides significant tax advantages for using the plan versus using an IRA to purchase leveraged real estate.
Cost-effective administration
A Solo 401k is administratively simple to operate. There is no annual filing requirement unless your Individual 401 k exceeds $250,000 in assets. You would then be required to file a short information return with the IRS (Form 5500 EZ).
To learn more about this powerful investment vehicle please click HERE or contact us at (949) 228-9394. Remember, no one will care more about your retirement account than you!