Solo 401k Tax Lien Investing: What are the pros and cons (Part 2)
If you are adding tax liens to your Solo 401k retirement plan, it is important to understand the benefits as well as setbacks of investing in them. After all, your retirement fund is at stake, so avoid unnecessary risks.
Pros of Solo 401k tax lien investing
- High return on investment: You can expect to receive returns of 5% to 36% on tax liens, although interest rates vary from state to state. For an instance, Alabama offers fixed 12% interest on tax liens, whereas Florida has a maximum interest limit of 18%. Such returns are not possible under traditional investment options and especially ones with a property serving as collateral.
- Hedge against market risks: Solo 401k Tax lien is one of the safest investments in the market, and they are majorly unaffected by economic turbulences. Further, you might receive the ownership in case the property owner fails to repay taxes, so the window for risk is comparatively small. When it comes to retirement investing, the key is to lower the risks, and with tax liens, your Solo 401k plan is in a much lower risk bracket.
- Relatively lower competition: It is common to find dozens of people in tax lien auctions, but the competition is still comparatively lower than other investment vehicles. Further, you can purchase unsold tax liens from previous auctions over-the-counter, although it is important to research the property first.
Solo 401k Benefits: Put away up to $24,000 in after-tax Roth account with Roth Solo 401k retirement plan.
Cons of tax lien investing
- Value of the property: Solo 401k Tax lien investing is for sophisticated investors only, as it requires in-depth research on property, and if you end up buying lien for a worthless property, you are on the wrong side of the table.
- Commercial institutions seeking investments: Hedge funds have developed an interest in tax liens, outbidding average investors, and bringing down interest rates in the process.
- Possible title issues: If you are aiming for the title of the property, you might discover existing liens on the property, and you will have to pay them all before getting a clear title. Make sure to hire a title research company for a title search before buying Solo 401k tax liens.
- Homeowner bankruptcy: If the homeowner declares bankruptcy, your chances of receiving returns sink way down. In the majority of chapter 7 bankruptcies, lien holders’ end up empty handed.
After a detailed study of Solo 401k tax lien investments, we can say that they are an excellent investment vehicle, but at the same time, investing in them requires experience. If you are planning to invest in liens without prior experience, it can be a serious mistake. If you intend to hire professionals, you might lose returns against their fees. On the other hand, if you are aware of the process and have experience with it, you can receive excellent returns on your Solo 401k investments. It is important that the interest as well as the original purchase amount should come back to the Solo 401k account only, where it will grow tax-free.