Are You One of the Lucky Investors Who Qualify for the Solo 401k?

Posted on November 9, 2015 by

Dorsie BoddifordIf the Roth IRA is the Corvette of real estate investing vehicles, then the Roth Solo 401k is the Ferrari.

Ok, so I know nothing about fancy cars. But I do know a thing or two about Solo 401ks. After setting up my own Solo 401k awhile back, I realized that there was very little out there where we as real estate investors could learn more about this unique retirement plan. After months of research and hours of consulting with some of the nation’s top custodians and lawyers, I enlisted the help of my father who has invested in real estate for over 35 years. Together, we compiled a book that I hope will serve as a valuable resource for real estate investors who are interested in strengthening their retirement accounts.

Never heard of a Solo 401k? It’s not surprising. Recent changes in the tax law have made this investment vehicle even more powerful. The Solo 401k is basically your average 401k without the huge company and all the extra employees so many of the ERISA rules do not apply. You may have heard it referred to as the Individual 401k or the Self-Employed 401k.

The Solo 401k is similar to an IRA in that you can self-direct the account into alternative investments such as real estate. There is also a Roth component of the Solo 401k where your after-tax contribution can grow tax-free. The contribution limits for the Solo 401k are much higher than those for the IRA. You may make an elective deferral of up to $18,000 ($24,000 if you are age 50 or older) per year. Your company that provides the plan can also contribute tax-deferred funds to the traditional portion of the Solo-401k for a maximum total contribution of $53,000 ($59,000 for those investors age 50 or older).

With the higher contribution limits for a Solo 401k, you can sock away more funds for tax-advantageous investing. There are few restrictions on what you can invest in, but the prohibited transaction rules do still apply for the Solo 401k. However, penalties for prohibited transactions are limited to the transactions themselves rather than penalizing the entire retirement account. This benefit alone has encouraged more and more investors to look into the Solo 401k.

Another advantage of the Solo 401k is that you can act as your own Trustee and Plan Administrator. That means that you can have checkbook control over your account without having to constantly solicit the services of a custodian for every transaction. You can write the checks yourself and keep your account funds at a local bank. Keeping your Solo 401k funds conveniently close by could also open up many more investment opportunities. This also means that the cost of the plan can sometimes be much lower than the cost for an IRA. These are only a few of the benefits unique to the Solo 401k that make it a powerful tool for the entrepreneur.

So are you one of the lucky investors who qualify for a Solo 401k? In order to be eligible for the Solo 401k, you must own your own business, and you and/or your spouse must be the only employees of that business. There are some exceptions to this rule, such as employees under the age of 21 and employees who work less than 1,000 hours for the business per year. The business may be a C or S corporation, an LLC or partnership (through which earned income is generated) or a Schedule C sole-proprietorship. This could even be a side business with it’s own Solo 401k, even if you already have a 401k with another company in which you are employed. The main requirement for the Solo 401k is that you have some type of self-employed earned income.

If this plan sounds good to you, then I would encourage you to learn more about the Solo 401k. As real estate investors, it is important that we use many different vehicles for our investments: some for long term cash flow, others for quick cash, and those vehicles for tax-advantageous retirement investing. When it comes to my retirement, I chose the Solo 401k.


Leave a Reply