Buy Real Estate through a Solo 401K to Achieve Total ROI

Your Return on Investment (ROI) is the most vital metric to measure success. When you invest in real estate, you may be able to achieve total ROI with a Solo 401K.

Do strategic investments with high returns interest you? Then you're in precisely the right place. This article will cover investing in real estate using a Solo 401K.

What Is A Solo 401K?

Unlike a traditional 401K, a Solo 401K (or self-directed 401K) is designed specifically for self-employed individuals. To qualify for a Solo 401K, you must be the sole owner or operator of a business with no employees other than your spouse.

What Are Some Advantages of Investing Through My Solo 401K?

Your Solo 401K offers unique advantages that make it an efficient and powerful investing tool. For a real estate investor, those advantages include:

  • complete checkbook control
  • no need for a custodian to act on your behalf
  • you handle all transactions through your Solo 401K

Another key advantage of using your Solo 401K to invest in real estate is avoiding the Unrelated Debt-Financed Income (UDFI) tax. For a real estate investor, you do not have to pay the 40% UDFI tax on income or gains on your investment paid for by your Solo 401K.

Here are two scenarios that illustrate the advantages of investing through your Solo 401K.

Scenario 1: Bob uses a Solo 401k and invests $100,000 of Solo 401k funds to acquire a real estate property. Bob also secures a nonrecourse loan from a bank for $100,000 and purchases the property for $200,000.

Assume the property generated $10,000 of net income in a year after calculating all eligible deductions. The UBTI tax would not apply to any of the income or gains generated by the real estate investment!

Scenario 2: Bob uses a Solo 401k and purchases a property for $200,000. Bob then sells the property three years later for $400,000. The $200,000 earnings Bob captured are tax-free!

How Can I Achieve Total ROI with a Solo 401K?

Typically you cannot use a traditional 401K to invest in real estate. However, the Internal Revenue Service (IRS) allows Solo 401K holders to invest in:

  • foreign currencies
  • precious metals
  • private placements
  • real estate

The Solo 401K is a powerful investment strategy that you can use for total ROI. Here is how you would go about using your Solo 401K to invest:

Step 1: Open Your Solo 401K Connected To Your Business Entity

The process entails making sure that your Solo 401K account is the only entity associated with:

  • contracts
  • documents
  • escrow deposits
  • maintenance
  • property expenses
  • repairs

Step 2: Fund The Solo 401K

You can fund the Solo 401K and make contributions using:

  • pre-tax deposits
  • rollovers
  • Roth
  • transfers from other qualified plans
  • voluntary after-tax contributions

Step 3: Choose How You Want To Purchase The Property

Typically, you have three options when you invest with a solo 401K:

  1. Cash purchases: are the most straightforward options in which you use funds from your account to purchase a property
  2. Tenants-in-common: allow you to use both personal money and Solo 401K funds to invest in a property
  3. Nonrecourse business loans: protect your assets from lawsuits, bankruptcy, and other potential risks

Step 4: Conduct The Transaction With Your Solo 401K

Your Solo 401K must be the purchaser of any investment property. If you use your name on any documents on the purchase, the IRS will prohibit the purchase. Conduct the transaction by having your Solo 401K:

  • make an offer
  • pay your deposit
  • close on the property

You are the trustee on the Solo 401K. As a real estate investor, you need to submit the purchase documents to your escrow agent. Store all the documents in a secure place.

How Can I Get Cash From My Solo 401K?

You can lend to yourself from the retirement plan, and the funds have no restrictions. You can take out half of your retirement account, or $50,000, whichever is lower.

For instance, if your retirement account had $75,000, you would be able to take out half of that amount, or $37,500. On the other hand, if your retirement account had $150,000, you would only be able to take out $50,000.

The loan money comes out of the fund as cash, but you must pay the retirement account back with interest. As long as you pay the market interest rate, you have the option to pay your loan back quarterly over five years.

For unique investing opportunities, check out our additional resources: Buy Tax Liens With Your Self-Directed IRA LLC OR Solo 401K.

Is A Solo 401K Plan Safe From Creditors?

Solo 401K plans do not automatically include protection from creditors. However, you do have protections under federal bankruptcy laws.

For non-bankruptcy creditors, protections fall at the state level. Solo 401K plans do not receive protection from the Employee Retirement Income Security Act (ERISA). State laws protect you in most cases subject to certain exceptions, such as child support.

Total ROI with a Solo 401K IS Possible

Investing in real estate may result in a total ROI with a Solo 401K.

There are some distinct and attractive advantages of investing with a Solo 401K:

  • complete checkbook control
  • no need for a custodian to act on your behalf
  • you handle all transactions through your Solo 401K

We covered four critical steps to investing with a Solo 401K:

  1. connecting your 401K to your business
  2. funding the retirement account with your contributions
  3. choosing how to acquire the property
  4. using your 401K for all transactions

Are you interested in learning more? Register for FREE Royal Investing Group Mentoring Wednesdays at 12:30 pm EST.

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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