Self-Directed Solo 401(k) Investment Possibilities

Author: Siân Killingsworth / 10 Jul 2020 / 401(k) Resources

Entrepreneur Managing a Roth Solo 401(k)

One of the great advantages of a self-directed Solo 401(k) is the wide range of investment options it offers solo business owners. With a self-directed solo 401(k), you have the freedom to decide how to invest your pre-tax retirement contributions. Owner-only businesses and spouses can open a Solo 401(k), whether they are incorporated or unincorporated, a sole proprietorship, partnership, or corporation.

Whereas traditional 401(k) plans limit your investment options to pre-approved funds, self-directed 401(k) plans allow you to choose exactly where you’ll invest your money.

Solo 401(k) Investment Possibilities

With a traditional 401(k) plan, you are limited to investments in annuities, mutual funds, and publicly traded stocks. Choose a Solo 401(k) for broader options on where you invest your money.

Solo 401(k) investment options include:

Accounts receivable
Bonds
Certificates of deposit
Coins and Bitcoin
Commercial real estate
Crowdfunding
Deeds
Developed land
Domestic real estate
Energy investments
Equipment leasing
Foreclosure property
Foreign currencies
Foreign real estate
House flips
Life insurance
Limited Liability partnerships
Mortgage
Mortgage pools
Mutual funds
Precious metals
Private equity loans
Private placements
Raw land
Residential real estate
Secured or unsecured promissory notes
Stocks
Structured settlements
Tax liens and deeds

Should You Use Solo 401(k) Funds to Invest in Real Estate?

The IRS permits using a Solo 401(k) to purchase real estate or land. As a trustee of the 401(k) plan, investing in real estate is as simple as writing a check from your 401(k) plan bank account. The benefit of buying real estate with your Solo 401(k) 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 401(k)s, 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 401(k) Different Than an Individual 401(k)?

There’s no difference! They’re just different names for the same thing.

How a Solo 401(k) Works

You can open a Solo 401(k) 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 401(k) 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 401(k) Limits for 2020

Like the Individual 401(k), the Solo 401(k) 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 401(k)?

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 401(k), check out our 401(k) resources page and contact us when you’re ready to take the next step. As one of the leading Solo 401(k) 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 401(k) is December 31.