What Kick Ass Entrepreneurs & Self Employed People Should Know: Solo 401k Benefits
If you’re a kick ass entrepreneur or self employed, this is one article you definitely want to read. But you know, all my articles are awesome in general, so even if you’re not self employed you may still want to read this.
A Solo 401k offers a self employed individual the ability to use their retirement funds to make any type of investment on their own without requiring the consent of a custodian. (Any type of investment except art and collectibles*)
The following are some examples of the types of investments you can make with your Solo 401k:
- Loans (personal, private, hard & soft, etc.)
- Foreclosure property.
- Stocks, Bonds, Mutual Funds
- Tax liens
- Raw land
- Private loans
- Private businesses
- Limited Liability Companies & Partnerships
- Residential or commercial real estate
- Mortgage pools
- Private placements
- Most currencies
Who Benefits The Most From a Solo 401k Plan?
The Solo 401k plan is designed specifically for small, owner only businesses. It’s a tax efficient and cost effective plan that offers all the benefits of a Self Directed IRA, and includes a couple of unbeatable benefits, such as high contribution limits (up to $60,000 or $54,000 depending on your age) and a $50,000 loan feature.
There are many benefits and features of the Solo 401k plan that make it useful to self employed individuals. These features and benefits are what make the Solo 401k plan so popular:
Roth Type Contributions
Roth IRAs have historically been unavailable to people with high income. But if you have a Solo 401k, you can use the built in Roth sub-account which can be contributed to regardless of how much money you make.
Flexible Investment Options
As I mentioned above, you can make almost any type of investment, including real estate and private stock, and then channel them back into your Solo 401k tax free.
I also mentioned earlier how the Solo 401k allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose. The interest rate on this loan will be the prime interest rate, which is around 4% give or take.
But be careful, failing to pay back this loan will “displease” your friends at the IRS to say the least!
Most IRAs generate Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) when they buy real estate. Which means they’ll end up paying more taxes. Thankfully, a Solo 401k plan is exempt from UDFI.
Sky High Contribution Limits
Under the 2017 Solo 401k contribution rules, if you’re under the age of 50 you can make a max contribution of $18,000. This amount can be made in pre tax or after tax dollars.
On the profit sharing side, a business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined max of $54,000, if you include the employee deferral.
If you’re over the age of 50 everything is the same, except your contribution limit is $60,000 instead of $54,000.
A Solo 401k can accept rollovers of funds from any other retirement account, such as an IRA, a SEP, or a previous 401k.
Employee Elective Deferrals & Employer Profit Sharing
For 2017, you can contribute up to $18,000 per year through employee elective deferrals. An additional $6,000 ($24,000) can be contributed for persons over age 50. These contributions can be up to 100% of your self employment compensation.
As an employer you can make an additional contribution up to 25% of your self employment compensation.
As I mentioned earlier, the contributions to a Solo 401k are capped at a max of $54,000 per year or $60,000 for persons over age 50.
But if your spouse also participates in the Solo 401k with you and earns compensation from the business, the spouse is allowed to make separate and equal contributions.
This would increase your combined annual contribution limit to $108,000 (or $120,000 if both spouses are over the age of 50).
Cost Effective Administration
The Solo 401k is not only easier to administrate, but it’s also cheaper! There are no annual filing requirement unless your Solo 401k plan exceeds $250,000, in which case you will need to file Form 5500.
Will You Need a Custodian?
Nope! The most cost effective benefit of the Solo 401k is that it does not require you to hire a bank or trust company to serve as trustee. This allows you to serve in the trustee role.
This means that all assets of the 401k trust are under your sole authority. You won’t have to pay fees, or wait for a custodians consent, unlike most other people with retirement accounts! And then you’ll also be able to invest in almost anything by simply writing a check.
Are There Any Administration Cost or Maintenance Fees If You Have a Solo 401k?
Yes and no. You won’t have to pay a custodian, so that kills 90% of the fees right there.
As for maintenance cost, there is generally no annual filing requirement unless your Solo 401k plan exceeds $250,000 in assets. If you have more than $250,000, you’ll need to fill out Form 5500.
Besides the $250,000 filing rule, you’re not required to do anything else. However, I would advise you to keep all records, receipts, and contracts related to your Solo 401k and its investments on file. So if you hire someone to do those things for you, that will probably be your biggest administrative cost.
Do you want to learn more about Solo 401k to see if it’s the right option for you? Check out our previous article to find out if you’re eligible for the Solo 401k.