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.
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.
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.
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) 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:
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.
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.
Ready to know more than your attorney? Join our community platform where you'll get immediate FREE access to all our best educational resources for real estate investors. Including 8 Masterclasses, group mentoring replays, and much, much more.
Join thousands of real estate investors in all 50 states as they enjoy exclusive content, special promotions, and behind-the-scenes access to me and my guests. No spam, ever. Just great stuff!