Self-Directed Solo 401k Investment Possibilities
Dylan Telerski / 10 Jul 2020 / 401k Resources
One of the great advantages of a self-directed Solo 401k is the wide range of investment options it offers solo business owners. With a self-directed solo 401k, you have the freedom to decide how to invest your pre-tax retirement contributions. Owner-only businesses and spouses can open a Solo 401k, whether they are incorporated or unincorporated, a sole proprietorship, partnership, or corporation.
Whereas traditional 401k plans limit your investment options to pre-approved funds, self-directed 401k plans allow you to choose exactly where you’ll invest your money.
Solo 401k Investment Possibilities
With a traditional 401k plan, you are limited to investments in annuities, mutual funds, and publicly traded stocks. Choose a Solo 401k for broader options on where you invest your money.
Solo 401k investment options include:
- Accounts receivable
- Certificates of deposit
- Coins and Bitcoin
- Commercial real estate
- Developed land
- Domestic real estate
- Energy investments
- Equipment leasing
- Foreclosure property
- Foreign currencies
- Foreign real estate
- House flips
- Life insurance
- Limited Liability partnerships
- Mortgage pools
- Mutual funds
- Precious metals
- Private equity loans
- Private placements
- Raw land
- Residential real estate
- Secured or unsecured promissory notes
- Structured settlements
- Tax liens and deeds
Should You Use Solo 401k Funds to Invest in Real Estate?
The IRS permits using a Solo 401k to purchase real estate or land. As a trustee of the 401k plan, investing in real estate is as simple as writing a check from your 401k plan bank account. The benefit of buying real estate with your Solo 401k plan is that all gains are tax-deferred until a distribution is taken. You can wait until age 70.5 to take the required distribution. In the case of Roth Solo 401ks, all gains are tax-free.
For instance, if you were to buy a property using personal funds, you’d be subject to federal and state income tax. On the other hand, you could feasibly buy $100,000 in property, later sell for $300,000, and enjoy the $200,000 of gain appreciation tax-deferred.
How Is a Solo 401k Different Than an Individual 401k?
There’s no difference! They’re just different names for the same thing.
How a Solo 401k Works
- You can open a Solo 401k if you are a business owner or self-employed person with no employees.
- As an employee (of yourself), you can contribute up to $19,500 (plus $6,000 as a 50+ catchup).
- If you earn less than that, you can put up to 100% of your earned income into the fund.
- As an employer (of yourself), you can contribute up to 25% of your first $285,000 in compensation.
- You may contribute up to the Solo 401k limits for 2020. (See the next section for details!)
- To get started, you’ll need to contact an online plan administrator like Ubiquity. Setup is quick and easy.
- You will need to file paperwork with the IRS every year once you have over $250,000 in your account.
Solo 401k Limits for 2020
Like the Individual 401k, the Solo 401k plan allows a maximum savings potential of $57,000 for those under 50 and $63,500 for those over 50. If you have a spouse and file joint, you may double this amount! With either plan, you can choose whether to pay taxes now (Roth) or later (Traditional). You can vary contributions and investments as you see fit, depending on how successful the business is doing in a given year.
Are You Eligible for a Solo 401k?
Take advantage of the widest range of investment possibilities if:
- You are self-employed, a sole proprietor, an independent contractor, a consultant, or in a partnership.
- You can generate income through an LLC, C-Corp, S-Corp, Limited Partnership, or Sole Proprietorship.
- You’ll just need to have an Employer Identification Number.
- If your spouse earns income from your business, you can combine assets in the plan.
- You have no W2 employees, but a few employees under age 21 or working PT (less than 1,000 hours).
- There are no “earned income” requirements, and you do not have to contribute to the plan every year.
If you have any additional questions about setting up a Self-Directed Solo 401k, check out our 401k resources page and contact us when you’re ready to take the next step. As one of the leading Solo 401k providers, we handle all the administrative and maintenance work for one low monthly flat-fee. You are free to work with the investment broker of your choice. The deadline for establishing a new Solo 401k is December 31.