Solo 401K – Best Plan For the Self-Employed

January 19th, 2012

A Solo 401K Plan is a qualified retirement plan that offers a self employed business owner with the ability to use his or her retirement funds to make almost any type of investment, including real estate, tax liens, private businesses, precious metals, and foreign currency on their own without requiring custodian consent tax-free! In addition, a Solo 401K Plan will allow a self-employed individual such as a consultant, real estate agent, doctor, dentist, mortgage banker to make high contributions (up to $55,500) as well as borrow up to $50,000 for any purpose. The Solo 401K Plan is an ideal retirement solution for the self-employed real estate agent who is looking to save for their retirement while investing in what they know – real estate!

The Solo 401K Plan offers the self-employed individual  the greatest retirement, tax, and investment advantages compared to a Traditional IRA, SEP, or SIMPLE IRA. A Solo 401K plan offers the same investment opportunities as a Self Directed IRA LLC, but without having to hire an IRA custodian, create an LLC.

The following chart will illustrate the advantages for a self-employed attorney of using a Solo 401k Plan:

 

Traditional IRA SEP IRA Solo 401K Plan
Maximum Annual Contributions $5,000 or $6,000 if individual is over the age of 59 25% of individual’s compensation up to $49,000 $49,000, or $55,500 if individual is over the age of 50
IRA Custodian Required Yes Yes No – account can be opened at any local bank
Checkbook Control Yes – but only with a Self-Directed IRA LLC which requires forming a LLC Yes – but only with a Self-Directed IRA LLC which requires forming a LLC Yes – no LLC is required to be formed
Loan Feature No No Yes – you can borrow $50,000 or 50% of your account value
Nonrecourse Financing Yes – but the nonrecourse financing would be subject to tax Yes – but the nonrecourse financing would be subject to tax Yes – generally no tax on the nonrecourse financing
Roth Feature No – must establish a Roth IRA which has income restrictions No – must establish a Roth IRA which has income restrictions Yes – no income restrictions

In addition, the following example clearly illustrates the advantages for a self-employed real estate agent to use a Solo 401K Plan over a Traditional IRA and SEP IRA.

Beth who is a real estate agent earns a $100,000 a year.  Beth is 43 years old and the sole shareholder of an S Corporation called ABC, Inc.  Beth is the sole owner and employee of the corporation.  Beth wishes to make the maximum mount of tax-deductible contributions allowed by law.  If Beth had used a Traditional IRA she would be able to make a tax-deductible contribution of just $5,000.  Whereas, if she had used a SEP IRA as the retirement vehicle, Beth would have been able to make a tax-deductible contribution equal to $25,000 (25% of $100,000).  However, if Beth had established a Solo 401K Plan, she would be able to make a tax-deductible contribution of $37,000 ($17,000 as an employee and a corporation profit sharing contribution equal to 25% of her compensation).  Thus, it is clear that the Solo 401K plan offers a self-employed realtor or real estate broker the greatest retirement benefit.  In addition, by using an Individual 401K Plan, Beth would be able to borrow $50,000 of 50% of her account value and use that loan for any purpose while having the ability to invest in real estate and other investments tax-free and without custodian consent. Moreover, the Solo 401K Plan account can be opened at any local bank, such as Wells Fargo or Chase.  A real estate agent would be able to roll over his or her former 401K or IRA funds to the new Solo 401K Plan tax-free (only Roth IRA or after-tax 401K funds are not permitted to be rolled into a Solo 401K Plan).

To learn more about the advantages of using a Solo 401K Plan, please contact a 401K expert at 800-472-0646