Solo 401k: Understanding The How, Why & The Basics

The self-directed 401(k), affectionately known as the Solo 401(k) or Solo-K, is an impressive vehicle for both asset protection and saving for retirement. If you’re an investor, entrepreneur, or anyone with an independent contractor or self-employment gig like Uber driving or your own business, you can’t afford not to know about the Solo-K. Here are the basics of what smart savers should know about the Solo 401(k), including how to get one and why you’d want to.

Why Using a Solo 401(k) is Smart, Especially for Investors

The Solo 401(k) has many great perks, and we have many other pieces diving into the details of self-directed investing benefits. So, let’s stick to the biggest reasons investors are attracted to this vehicle. 

The asset protection strength of this vehicle lies largely in the fact that no creditor can come after plan-owned assets. So, any money you place in your Solo 401(k) cannot be seized to satisfy a debt, a feature known as creditor protection.

Solo 401(k)s also allow you to invest in far more than a Traditional 401(k) counterpart. Traditional plans are often limited to the financial products offered by the financial institution you get the plan from. While many savers are content to use traditional plans, investors actually have an edge with self-directed accounts. 

The beauty of having so many choices is that you can go with what you know. If you’re like our clients and are into REI, you can actually use your Solo 401(k) to purchase real estate and hold profits in savings. Your knowledge of your asset class gives you the ability to out earn “safer” plans. But such freedom of course comes with responsibilities. 

What Real Estate Investors Should Know Before Opening a Solo 401(k) 

The biggest factors predicting self-directed accounts’ success will be your personal investing success, followed by experience and willingness to listen to advice. Your knowledge of your market and asset class, smart strategy, and due diligence dictates how much your Solo 401(k) helps you. 

Investors who make foolish decisions, like betting the farm on a risky fad investment, can definitely lose money. People who lack any experience with investing are actually better off with a custodian and Traditional plan. They need this support.

We usually find that investors tend to make more money with these plans, because investing abilities and habits directly influence how well the 401(k) performs. Without a custodian running the show, you’re without a safety net but also free of the confines of traditional plans with narrow investment options. 

Your plan is backed by investments of your choosing, so choose wisely. For REIs, it’s equally crucial to diversify a Solo 401(k)’s investments to protect against the inevitable deal that doesn’t go, as well as planned. 

How to Use a Solo 401(k) to Build and Protect Retirement Savings

The process for opening a Solo 401(k) is fortunately very straightforward. First, you’ll need to find a firm or custodian who offers a Solo 401(k) with Checkbook Control (more below on how to find the right fit for you, so stay tuned). This detail is important, as Checkbook Control is the feature that gives you the power to invest your retirement dollars in non-traditional assets. It’s essential for exploiting the full benefits of the Solo 401(k)’s diversification powers.

From there, you simply need to make an intelligent plan about where you want to stick your retirement dollars. Many conventional financial planners recommend and 80-20 split for self-directed investing. That means spending 80% of your investment dollars on areas you know well. For those of us in real estate, there’s a reason the Brits call a sure bet “safe as houses.” If you’re successful in this area, this would be in your 80%. 

As for the 20%, that’s the “play” with. For instance, if you bought Bitcoin to capitalize on currency fluctuation out of curiosity, that’s “playing.”  Crypto’s a popular 20% choice as most investors aren’t experts in this area, but you can pick from any asset class in the world.

Forming Your Solo 401(k): The Basics

Forming your solo 401(k) starts with making the decision. All you need to do is decide whose assistance you trust well. Certain groups sell these products from a financial planning perspective. Account-hawking firms are usually barred from giving tax and personal financial advice if their role is narrowly defined. If you need more support, an attorney skilled in using these accounts for investors may be a better option.

Regardless, when you pick the professional or custodian, you’re using to create your plan, here are some things to keep in mind:

  • Good pros ask and answer lots of questions. This is a reason to consider using a real estate attorney because that’s the first thing any of us do: ask you what’s up. A financial firm that sells these accounts only may be just as attentive, or cheaper options may put more control in your hands. 
  • A custodian who pushes a product is a red flag. If your custodian’s pushing a product before you even tell them a thing about your situation, that’s a bad sign. Usually, it means that’s their lucrative product. At best, you may end up with a less-than-ideal account for you. At worst, you’ll get one from a custodian who only cares about making sales, or intentionally leaves out critical details like your 401(k) compliance obligations.
  • Don’t forget compliance. It’s a huge deal, and our primer on eligibility is worth a glance for any 401(k) owner.

We hope you get to experience the financial freedom of the 401(k). Take your self-employment savings to the next level, all while enjoying your plan’s asset protection powers. Need assistance getting your Solo 401(k) set up? Take our financial freedom quiz to get started. Upon completing the quiz you will have the opportunity to book a consultation.

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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