“The most powerful force in the universe is… compound interest.” ~ Albert Einstein
One of the brightest humans to live among us acknowledged the power of compound interest, and it is time for you to accept it too. Investing is not rocket science, and the key is to allow your investments to grow ‘undisturbed’ for longer periods. If you are a self-employed professional or small business owner, investing and retirement savings become even more critical for you.
Without taking much time, let us discuss the ‘undisturbed’ part of investing with a Solo 401 k plan. Any investment made through Solo 401 k retirement plan is tax-deferred, which means it will gain interest for the complete investment period without regular tax deductions, as deductions are applicable only at the time of distribution. This feature accelerates the net growth of your investment, and with Solo 401k, you can invest in real estate, tax liens, tax deeds, mortgage notes, precious metals, private business financing, and similar opportunities. In this post, we’ll target tax liens as an investment vehicle and find out the best practices for investment.
Solo 401 k Investing: What are tax liens?
Tax liens come into effect when a property owner fails to submit due payments or other federal taxes, and the relevant authority issues a lien against the property, thereby allowing the lien-holder to collect taxes on its behalf. Tax liens serve as an excellent collection tool for local municipalities, as the municipality receives the delinquent amount immediately, and the lien-holder receives the right to collect taxes along with an interest in the future. In short, if you add tax liens to your Solo 401k retirement plan, you will receive the tax amount as well as an interest, which will grow tax-free in your plan.
Solo 401 k Benefits: You can contribute up to $59,000 annually, nearly 10 times more than traditional IRA account.
What are the different types of tax liens?
“Knowledge is power.” ~ Francis Bacon
Retirement planning, much like other disciplines, requires education, and the key to a large retirement fund is to understand the investments that you are getting into. Tax liens differ depending upon the reasons behind their issuance.
- Property tax liens: As the name suggests, property tax liens are issued when a property owner or business owner fails to submit property tax payments, and they involve local municipality or state government.
- Income tax liens: Income tax liens are issued by the IRS against delinquent taxpayers, although the IRS often garnishes taxpayers’ bank accounts to obtain the taxes before issuing liens.
- Judgment liens: If a creditor wins a judgement against the property owner, he gets the right to put a lien over the house.
There are several other types of tax liens, including mechanic liens, child support liens and divorce liens. When choosing a tax lien for your Solo 401 k retirement plan, it is best to stick with property tax liens, as these are easy to manage, and you can perform the due diligence easily.
Solo 401k Benefits: Solo 401 k offers a wide variety of investment choices, including real estate, tax liens, tax deed, precious metals, private business investing, and other alternative investments.
How to make money with tax lien investing?
Once you purchase the tax lien, there are two ways of making money, including interest payments and the other one is to foreclose the property. If you own a tax lien, the property owner is liable to pay the value of the lien along with an interest, which varies from one state to another, may range between 5% and 36%. Since liens come with a repayment period of six months to three years, you can benefit from quick capital gains in comparison to other traditional investments.
However, if the property owner fails to make the payment, you have the right to foreclose the property and collect the due amount. In either way, you can add more money to your Solo 401k retirement fund against traditional CDs, while avoiding higher risks involved in equity market investments.
Understand the responsibilities of tax lien owner
The ownership of tax liens comes with certain responsibilities, which may differ from one state to another, starting with providing written notice to the homeowner. Further, when you call for collection, you might accidentally trigger some legal actions, so inquire about the frequency or time of calls to avoid any harassment charges. If the property owner is unable to repay the due amount, you might have to move forward with foreclosure. Find out the local foreclosure process, and it is best to hire a real estate lawyer to help you in the matter.
Solo 401k Benefits: Solo 401 k retirement plans allow participant loans of up to $50,000 to every single participant.