Advantages & Benefits Of The Solo 401k Plan

The Solo 401k is a unique plan because it only covers the 401k owner and his or her spouse.

Those who take advantage of a Solo 401k can receive all the benefits of traditional 401k’s without having to worry about the Employee Retirement Income Security Act (ERISA).

A Bit Of 401k History.

Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no incentive for an owner-only business to establish a 401k plan.

After all, why bother to when you could receive the same benefits by adopting a profit sharing plan or SEP IRA?

However, EGTRRA changed everything. After EGTRRA, Solo 401k’s became the most used retirement plan for the self employed. This is because EGTRRA makes it possible for an owner-only business to defer more money into a retirement plan cost effectively than a profit sharing plan.

One of the key changes brought about by EGTRRA was that it added the employee deferral feature found in a traditional multiple employee 401k Plan to the Solo 401k plan. This feature turned the Solo 401k plan into a plan that continues to provide the highest contribution benefits to the self employed.

Who Is A Solo 401k Great For?

A Solo 401k plan is perfect for any sole proprietor, consultant, or independent contractor. A Solo 401k plan offers the same abilities as a Self-Directed IRA LLC, but without having to hire a custodian or create an LLC.

The Solo 401k plan allows you to:

  • Roll over your existing IRA or 401k plan funds tax-free into a new Solo 401k plan and use those funds to make tax-deferred investments, such as real estate.
  • Borrow up to $50,000 as well as make annual plan contributions up to $60,000. (More than 9 times the amount of an IRA contribution.)

The Solo 401k Is The Greatest Retirement Account For The Self Employed Individual.

There are a number of benefits that are unique to Solo 401k plans, which make them a far more attractive retirement option for a self employed individual than a Traditional IRA.

In fact, here’s 8 of those unique Solo 401k benefits:

  1. Simple Administration.

With a Solo 401k plan there is no annual tax filing for any plan that has less than $250,000 in plan assets.

Note: If your plan has more than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed.

  1. Roth After Tax Benefit.

A Solo 401k plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a Traditional IRA, contributions can only be made in pre-tax format.

  1. Borrow Up To $50,000 Tax Free.

With a Solo 401k plan you can borrow up to $50,000 or 50% of your account value, whichever is less.  The loan can be used for any purpose.  Traditional IRA holders cannot borrow money from their IRA, unless they want to trigger a prohibited transaction.

  1. Buy Real Estate With Leverage Tax Free.

 With a Solo 401k plan, you can make a real estate investment using non-recourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax.

If you were to use an IRA to make a real estate investment (Self Directed Real Estate IRA) involving non-recourse financing would trigger the UBTI tax.

  1. No Need to Establish an LLC.

With a Solo 401k plan, the plan itself can make real estate and other investments without the need for an LLC.

Since a 401k plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC. (You would be the trustee.)

  1. Protected From Creditors.

A Solo 401k plan offers greater creditor protection than a Traditional IRA.  The 2005 Bankruptcy Act generally protects all 401k Plan assets from creditor attack in a bankruptcy proceeding.

Also, most state laws offer greater creditor protection to a Solo 401k qualified retirement plan than a Traditional IRA outside of bankruptcy.

  1. Maximize Your Investments

 A Solo 401k plan includes both an employee and profit sharing contribution option. Whereas a Traditional IRA has a very low annual contribution limit.

Under the 2017 Solo 401k contribution rules, if you’re under the age of 50 you can make a maximum employee deferral contribution in the amount of $18,000.

On the profit sharing side, your business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including your employee deferral, of $54,000.

If you’re over the age of 50, you can make a maximum employee deferral contribution in the amount of $24,000. Up to a combined maximum of $60,000.

Note: If your plan has more than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed.

  1. Freedom Of Choice.

A Solo 401k will allow you to make traditional as well as non-traditional investments. As trustee of the Solo 401k plan, you will have “checkbook control” over your retirement assets and make the investments you want when you want.

The many features of the Solo 401k plan you read above is why the Solo 401k plan or Individual 401k Plan it so appealing and popular among self employed business owners.

With A Solo 401k You:

  • Don’t need to pay a custodian.
  • Have the ability to make maximum contributions 9 times higher than the traditional IRA holder.
  • For 2017, you can contribute up to $54,000 per year or $60,000 if you are over age 50. If your spouse is involved in the business, they can contribute an additional $54,000 (or $60,000 if they are over the age of 50) per year.
  • Can make investments without having to wait for someone else.
  • Can invest in real estate, private companies, precious metals, and virtually anything else.
  • You can borrow up to $50,000 from your Solo 401k plan for any purpose.
  • Gain control of your retirement funds.
  • Can diversify your retirement portfolio.
  • Serve as trustee of your Solo 401k plan.
  • Make Roth contributions to your Solo 401k plan.
  • Use non-recourse leverage to purchase real estate without penalty or tax.
  • Maintain a qualified retirement plan and help save for the future.
  • Access your retirement funds to make the investments you want when you want tax free.
  • Grow your retirement funds tax free.

 

To learn more about how a Solo 401k can benefit you, call Royal Legal Solutions today at (512) 757–3994 to schedule your free consultation!
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