Posted over 4 years ago

Self-Directed Solo 401k Plans For Real Estate Professionals

Solo 401k retirement plans are the ideal tax advantaged account for real estate professionals. Solo Ks are incredible financial vehicles that are available only to those that meet certain criteria: (a) they have some self-employment income and (b) they do not have full-time employees.

For those that qualify, the Solo 401(k) provides the ability to invest their retirement funds in real estate, tax benefits on up to $120,000 per year, the ability to take loans from the retirement plan, and many other features. The SoloK can be used for every form of real estate equity and debt investment, including private lending, hard money lending, tax liens & deeds, notes….you get the idea. Of course, it’s not limited to real estate – it can be invested in nearly anything you can imagine.

With the Solo 401k you get total “checkbook control” because you’ll be the trustee, administrator, and beneficiary of your plan. There’s no requirement that a qualified custodian be involved.

Real estate professionals often have self-employment income and KNOW REAL ESTATE, making the Individual(K) the perfect plan. Self-employment income includes all earned income, regardless of whether the income comes from an LLC, corporation, sole proprietorship, or unincorporated entity.

Taking Solo 401k to the Next Level

Solo 401(k) Plans can be customized for maximum tax benefits. They can include provisions that allow for annual Roth contributions even for those that don't qualify for a Roth IRA due to their MAGI. That translates to tax-free earnings on those amounts.

In addition, you can magnify the power of the Solo K by rolling other retirement funds into the plan. An important heads-up: if rolling over from IRAs, only pre-tax IRA funds can be moved into a 401(k).

Leveraged real estate investing within certain tax-free accounts can generate UDFI, a form of income that is taxable even within retirement accounts. A Solo 401k DOES NOT PAY this tax when investing in real estate.

SEP IRA vs Solo 401k

A common question that arises is, “my CPA suggested a SEP-IRA, why is a Solo 401k better than a traditional SEP?” That’s a good question with some powerful responses.

  • Solo 401k assets can be invest in real estate and any other assets 
  • Solo 401k allows you to directly control your retirement money
  • Solo 401k allows for both Roth and traditional contributions
  • Solo 401k allows higher tax deductible contributions in most scenarios
  • Solo 401k allows for tax-deductible salary-deferral contributions
  • Solo 401k loan feature: Borrow money from your Solo 401k to use for any purpose
  • Cost savings: Over time, investing with a Solo 401k costs much less
  • Solo 401k allows for additional “catch-up” contributions for those aged 50 and higher

The Bottom Line

There’s no vehicle that is even remotely comparable to a Solo 401k. Solo 401k vs SEP-IRA is a non-starter. The Solo 401k is more flexible, more cost-effective, more tax-efficient, easier to manage, and provides for far greater tax advantages.