The Solo 401(k) can certainly stir up some confusion. In fact, the whole world of self-directed investing can. So in the interest of saving your precious time, and helping you maximize every single one of your retirement dollars, we’re collecting our FAQs about the plan to answer more of your questions in one place. Let’s look at some of our most common ones.
First of all, it isn’t always. The Solo 401(k) is only better for some people, namely the people that qualify because of self-employment income. So if that doesn’t apply to you at all even through your investments, you’re both ineligible for the Solo 401(k) and unlikely to benefit. But because you’re here reading through the Royal Legal Library (Thanks, by the way! Stay as long as you like and learn all you want for free here!), we’ll assume you’re either an ass-kicking entrepreneur or real estate investor like our clients, or someone who got here because you need this info. Or maybe you just want to be the smartest investor at the room at your next meet-up or have a pal who could use this down the line. So here’s why the Solo 401(k) is better for some investors.
Note From Your Friendly Legalese Translator: We’ve actually got a hack real estate investors can use to structure REI income for a Solo 401(k) eligibility. FAQ #5 below spells out details. But for now, understand that us asset protection pros create structures and help you understand the legal narrative around your plan. The legal narrative matters for you and explaining your structure to someone like, say, Uncle Sam. That’s the only person, other than your own paid helpers, you EVER should have to explain to other than a Judge. If you (against sane legal advice) volunteer info to others, you at least want to tell the same story that you tell the Taxman. Your legal structures do most of the work, but understanding the legal narrative, or the story we tell about these structures in simple terms helps you really understand and exploit them. Knowing the story matters for your Solo-K or any legal tool.
The solo 401 (k) certainly is better for self-employed people and many investors. If you’re among them, you can confirm personal suitability with your attorney, CPA, or other financial advisor. But the most basic reason it’s “better” for these folks is it gives them an option at all. In the bad old days, there wasn’t a good vehicle for stashing retirement savings.
But things got really awesome for investors when some regulations relaxed in the 2000s, even though the Solo 401(k) was created under the Carter Administration. You know, the one you may remember from not remembering much of if you’re a Millennial, or if you’re more experienced, you may think of him as that unfortunate peanut farmer from Georgia who was trying to hammer out the Iranian Hostage Crisis while you were getting your ass-kicking real estate business going. You can thank that Southern-accented, now nearly 100-year-old peanut farmer’s staff for the Solo-K, no matter what you think of the man himself. Carter’s people made this kind of investing a possibility, and one of his Presidential predecessors even the Millennials like our Legalese Translator remember allowed regulations to loosen further. Between them both, and just for the record, each was of a different party, all of us can now enjoy Solo-K’s with Checkbook Control based just on having a real estate portfolio and appropriately arranged structure.
You’ll see mention of Checkbook Control neatly scattered throughout virtually anything you read about the Solo 401(k). Of course, not everyone neatly explains the details as we do here in Royal Legal Land. Checkbook control isn’t just an ad keyword or some kind of marketing term, it’s actually the feature linked to the account’s most obvious benefit: the ability to go beyond the world of traditional financial products.
Checkbook control is the feature that enables you to enjoy the full liberties of a self-directed account. These words can be confusing, because they evoke the image of an actual checkbook, so think of “checkbook” as shorthand for “your entire account.” Checkbook control actually refers to the power you get to make nontraditional investments restricted only by Tax or Labor Code law. So you may find it easier to remember like this: it’s called checkbook control because you get to control your investments yourself. Self-directed 401(k)s come with Checkbook Control usually, but you want to be sure. A plan without checkbook control would be extremely limited. Note that you can also get this feature on other types of accounts like the self-directed IRA and its Roth version.
Here’s the hack we’ve been teasing. You really can structure your real estate business accounts to justify Solo 401(k) eligibility. Remember, the accounts for businesses with sole owners. If that’s not how your REI assets are currently structured, it’s surprisingly easy to do. Most investors with LLCs or unused Series are able to tweak these structures, or you can create an entirely new business with an attorney’s help to ensure you’re complying with the requirements.
But yes, it’s possible to arrange your REI assets and flow of income from these investments to qualify for a Solo-K. And we haven’t even gotten into the details of how you make even more money for your portfolio by using your Solo 401(k) to make real estate investments, but this dream’s real too.
Now, this trick won’t work if, say, you need to own a corporation for your business or MUST have full-time employees (see our piece on eligibility if you’re unclear why: it’s one of the two main criteria). But for those without such complications, the Solo-K can be the easiest qualified retirement plan to form as well as one with the most perks just for REIs.
As of 2019, the time of this writing, contribution maxes are higher than ever. Savers under 50 years old can contribute $56,000 for the year. Those above 50 may make an additional $6,000 in catch-up contributions or a total of $62,000 for Tax Year 2019.
You generally can’t go beyond the limits because there are provisions for catch-ups, which the Taxman sees as a “good reason” to let someone stash an extra 6k (for now). That person 51 or older is nearing the end of their career and gets to squirrel away some more. The spirit of the catchup contribution is also to help those folks who didn’t start saving early enough: they may be earning more and can “catch up” at the end of their working lives. We encourage everyone to start saving as young as possible and make sure our top ten retirement savings tips for any age are free to you.
Just to compare the Solo-K to its more common employer-sponsored sister, the Solo-K tops the Traditional in terms of your contribution abilities. For Tax Year 2019, a Traditional 401(k) account’s contribution limits sit firmly at $19,000 for savers under fifty. Those 51 and over get the wiggle room for catch-ups just like the Solo-K holder. That’s nearly ⅓ of the Solo-K’s capacity, and remember that’s an annual figure. A Solo-K alone can hold enough for most of us to retire with everything we need if not in style.
You may have noticed we’re hung up on the year, but that isn’t because maximums go up automatically or anything. They may not change at all, but if they’re going to, it will be for the new tax year. Maximum contributions for the 401(k) tend to rise over time in fairly small increments of $5,000-$6,500 (though that’s still way higher than limits for IRAs or their increased amounts). All retirement savers can remember these rules update annually and make a habit of checking for the “new” numbers around the first of the year. That way, you can save all year long, squeezing every ounce of power out of that Solo-K.
We encourage retirement planners to max out their plans when possible. Whether it’s possible for you depends on your other expenses and personal details. Maxing out isn’t necessarily in everyone’s best interest, but it is best to max out contributions to any accounts you can afford to. A retirement penny saved can turn into a retirement dollar earned when you fully leverage every fraction of that cent with a Solo 401(k).
And if you have multiple accounts? You may indeed max them all out. We have some investors who just pick the order of importance in case they ever need to scale back savings, too. For example “If there’s an emergency, I’ll prioritize my Solo-K, then my self-directed Roth IRA, than my Traditional IRA, then my spouse’s plans.” We do recommend coming up with emergency plans of this kind just in case.
Heck, even if you need to scale savings down for a month or two because of a real deal crisis, at least you’ll know your plan and not compromise the diversified portfolio if you know which accounts are most beneficial. In the example, the accounts were prioritized in order of freedom and max contribution amounts, so feel free to borrow that template for your own use.
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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