For self-employed professionals planning to add a tax lien in their Solo 401k retirement portfolio, it is important to understand the lien sale process in their target county. The best way is to contact the county tax office or treasury department, as some counties conduct tax lien auctions whereas others prefer an online auction model. The three popular tax lien-purchasing methods include: public oral auctions; online auctions; and over-the-counter sales. If this is your first opportunity to buy a tax lien, stick to online auctions or over-the-counter sales, although do proper research about the properties before purchasing them.
Solo 401k Lien Investing: Understand lien bidding methods
- Premium bidding: Under premium bidding, available bidders bid on the cost of the lien, hence pushing its prices higher than the initial opening bid. If this is your first auction, it is best to observe first few liens before bidding, as the number of bidders are lower for the liens announced towards the end. If you are new to Solo 401k Lien Investing, you might want to avoid premium bidding without expert help.
- Bidding down interest: Another method in lien auctions is bidding down interest, under which the bidders call lower bids for the percentage of interest paid upon lien redemption. The bidder with the lowest bid will be awarded the lien, and if you decide to go this route, make sure that the returns are worth your effort. Solo 401k Lien Investing requires a solid understanding of financial concepts, so make sure that you can make money out of this investment, and avoid bidding too low.
- Bidding down ownership: If you are aiming towards some physical real estate in your portfolio, bidding down ownership could be an affordable option for you. Under this method, bids are made on the percentage of ownership, and the bidder who agrees to the lowest percentage wins. For an instance, between two bidders with 98% and 92% bids, one with 92% will win the lien certificate.
Solo 401k Lien Investing Benefits: Solo 401k retirement plans are easy to manage, especially in terms of annual filings. According to the IRS, you only need to file when your Solo 401k fund exceeds the $250,000 limit.
Solo 401k Lien Investing: Why investing in tax liens with Solo 401k makes sense
- Lower risks: Tax liens have a lower degree of risk, and if you follow the lien selection procedure we just covered, the chances of loss will be minimal.
- Higher market returns: Tax liens can earn anywhere between 5% and 36%, which makes them a better investment against a basket of traditional investments. If you are ready to input efforts and understand tax liens, it will be an excellent addition to your Solo 401k portfolio.
- Short maturity period: The redemption period of tax liens vary from six months to a maximum of 4 years, offering quick returns to the investors. Further, it is comparatively easier to manage tax liens than physical real estate.