Investors Love The Solo 401k: Here's Why

The self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—isn’t all that different from a "regular" 401(k) on paper.

Its name actually derives from the fact that it is a “one participant" retirement plan. But solo 401(k)s offer a whole new level of freedom as far as investing your retirement dollars goes. The seasoned investor can use their knowledge to get an edge. He or she may develop a diverse retirement portfolio that includes nontraditional assets, including real estate.

Our clients love the solo 401(k) for many reasons, but these are some of our favorites.

Sweet Freedom: Invest Where Your Expertise Lies

The solo 401(k) with checkbook control has the ability to break free of the world of traditional investing. You can diversify your retirement dollars across almost anything when you use this type of account. In fact, the IRS only prohibits three specific types of investments:

  1. S-Corporation Stock
  2. Collectibles
  3. Life insurance policies

Beyond these three things, the sky’s the limit. So you’ll have to find another place to stash your classic cars (may we recommend an asset-holding structure such as the series LLC?). But aside from these three off-limits categories, that leaves literally everything else on the planet that one can invest in.

So if you’re a commodities or crypto genius, maybe this is the plan for you. You can invest in these nontraditional assets only with self-directed accounts. The checkbook control feature of such plans gives you this liberty.

The fact that you can invest in real estate with a solo 401(k) is a major draw of this self-directed account for our real estate investor clients. Whether you’re just starting out or have been in the game for a long time, many investors and entrepreneurs who are solo 401(k) eligible use the plan to make real estate investments.

Here’s an educational resource you can use to learn more about the benefit of buying real estate with a self-directed 401(k).

The Solo 401(k)’s Tax Benefits: Just The Highlights

There are a host of benefits exclusive to the 401(k), and tax perks make up the bulk of them. Savvy investors can use their knowledge of the plans tax benefits to purchase tax-advantaged real estate, defer income.

  • Deferred income benefits. Your solo 401(k)can’t do business with you or any businesses you own. Doing so, or attempting to, is called “self-dealing.” It’s against the rules because of the many obvious opportunities one would have for corruption if doing business with yourself weren’t prohibited. Investors especially are already known for bending the rules, and prohibited transaction principles against self-dealing prevent plenty of scandalous possibilities. 
  • Access for self-employed people. Prior to one-participant accounts, self-employed people didn’t have many options for retirement savings at all.
  • Viable for real estate business profit savings
  • Capital gains deferrals. Prohibited transaction penalties are something to look out for. 
  • Tax benefits for contributions. There are many possible ways the solo 401k can reduce your taxable income, but you’re also eligible for other perks like the easy Savers Credit. Learn more about how you can save on your self-directed 401(k) come Tax Season.

Savings Benefits: Sky High Contribution Limits

Unlike the self-directed IRA, the solo 401(k) has remarkably high contribution limits. While at the time of this writing IRA contributions max out at $5,500 (or $6,500 for workers at the eligible age for catch-up contributions), you can contribute up $60,000 to your solo 401(k) if you’re under fifty. If you’re over, you get an extra $6,000 allowance for catch-up contributions.

Flexible Lending Options

While 401(k) and asset protection experts may debate the wisdom of taking advantage of this feature, you can indeed borrow up to 50% of your 401(k) for essentially any reason. Many real estate investors use this perk as a way to finance their investments.

The reason actually borrowing from your 401(k) is a dice-roll is if you do make a bad deal, your retirement account is what really suffers. Recovering isn’t always easy, and real estate investors can mismanage funds by say, over-investing in a single property, neglecting due diligence with their 401(k) investments, or failing to request the proper professional help before making moves with their plans. Don’t be one of them.

The smart investor, on the other hand, can use this feature for a tax-friendly, easy loan: the self-directed 401(k) loan. Applied wisely, it can multiply your funds. The outcome really depends on your investing ability, which is both a blessing and a curse with self-directed investing. But hey, that’s the price of freedom.

Last Updated: 
August 20, 2019

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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