Solo 401k: The Biggest Tax-Saver

Solo 401k is the biggest tax-saver for real estate investors. No one likes to pay taxes, but like death–they’re inescapable.

We can’t help you escape death (we can help you plan for it), but we can help you minimize some of the onerous tax burdens you may incur due to your earned income. 

Watch Pete Schindele, CFO and CPA of Royal Legal Solutions, discuss why investors love the Solo 401K in his Royal Investing Virtual Summit presentation, Solo 401k: The Biggest Tax Saver.

In this article, we’ll discuss the features of the Solo 401K, who needs it, why the Solo 401K is the biggest tax-saver, and how to use a Solo 401k to build wealth. 

Solo 401k: Features, Myths, and Benefits

What is a Solo 401k? It’s an individual 401k that primarily benefits a business owner with no employees. 

The IRS disallows you from contributing to a Solo 401k if you have any full-time employees in your business. But you can use the plan for both you and your spouse. 

Features of a Solo 401k

Here are the basic features of the retirement plan: 

  • Must be a business owner with no employees
  • No age restrictions
  • No income restrictions
  • Employer total contribution limit of $61,000
  • Spouse exemption allows you to double your contribution
  • Catch-up limit of an additional $7,500 if you’re 50 or older
  • You can invest in almost anything with it
  • Can create in addition to existing 401k

Myths Surrounding Solo 401k Plans

MythI can’t have more than a retirement account.

Truth: You can have more than one; it’s legal, and you act as the fiduciary. 

Myth: I’m too young to think about retirement.

Truth: You’re never too young to invest in retirement and get returns on any amount you set away in your Solo 401k.

Myth: I don’t have enough money to plan for retirement.

Truth: Some money is always better than no money in your retirement account; if you fail to plan, then you are planning to fail–especially in retirement.

Benefits of Solo 401k

  • Tax benefits
    • Traditional 401k option: contributions reduce your income in the year you make them and are taxed as ordinary income
    • Roth solo 401k: no tax break when you contribute, but your distributions are tax-free when you retire
  • Grow net worth by investing tax-free
  • You control your investments
  • Roll over retirement accounts from past employers
    • Wire it, don’t take cash because the IRS may see it as a distribution 
  • Easy to create and manage
    • Single tax form for CPA to fill out

Who Can Use A Solo 401k As Their Biggest Tax-Saver?

That depends on where you are on your journey. However, a Solo 401k is a powerful tool for real estate investors. As such, real estate investors need a Solo 401k because it enhances their real estate investment returns.

The Solo 401k is an integral part of the bigger picture regarding securing your financial future. It’s part of a comprehensive ecosystem geared to generate wealth and provide asset protection so you can: 

  • Achieve financial freedom
  • Reclaim your time
  • Protect your assets
  • Build your legacy

How To Purchase Property With A Solo 401k

Purchasing property with a Solo 401k makes this retirement plan a powerful tool for real estate investors. 

  1. Open A Solo 401k: You create a Solo 401k with an EIN and signed plan documents.
  2. Fund The Solo 401k: Fund it in various ways by:
    1. Making annual contributions
    2. Transfer from qualified plans
    3. Rollovers from Traditional IRAs, SEP IRAs, SIMPLE IRAs
  3. Determine Purchasing Method For Property: You have four options using a Solo 401k to invest in physical real estate. Each method has specific guidelines and rules:
    1. Cash purchase
    2. Debt financing: Get a nonrecourse loan to purchase a property
    3. LLC: Solo 401k housed within an LLC 
    4. Tenancy In Common (TIC): With a partner
  4. Put Your Offer Together: Your Solo 401k makes the offer on the property. You (the trustee) sign for the plan, and the earnest money deposit comes from the Solo 401k. 
  5. Close On Property: When you close, you (the trustee) approve and sign the property purchase documents and submit them to the closing agent. The Solo 401k wires or cuts a check for final funding. 

Managing Real Estate Bought With A Solo 401k

Once you buy a property with the Solo 401k, the plan manages the property. That means that the Solo 401k pays the bills, including: 

  • Expenses
  • Property tax
  • HOA fees
  • Insurance
  • Property management fees
  • Maintenance
  • Utilities

Never mix personal funds with Solo 401k funds; otherwise, you may trigger a massive tax event.

What about rent?

You must deposit rent checks directly into the Solo 401k account. In addition, you cannot use the rental income personally. If you withdraw the funds for personal use, it becomes a taxable distribution. 

Key Takeaways On The Biggest Tax-Saver

A Solo 401k is the biggest tax-saver for real estate investors. It allows you to control your money and offers excellent tax benefits. 

Moreover, a Solo 401k is especially beneficial when you use it to purchase real estate as it gives you unique benefits and tax-sheltered income. All in all, a Solo 401k is a robust retirement plan that generates wealth. 

Do you still have questions about how you can leverage a Solo 401k in your real estate investing journey?

Join us for our weekly Royal Investing Group Mentoring so our expert contributors can answer all your questions, dish out additional information, and provide best practices to help you succeed. 

Last Updated: 
March 15, 2023

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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