Solo 401K Real Estate Investing

Solo 401K

Real Estate Solo 401K

If you are self employed, you can set up a Solo 401K or Solo 401K Roth plan and invest in real estate or even use your 401K to buy a business.

Shelter up to $98,000 a year
You can use the Solo 401K with a loan to buy property
You do not pay tax on the gain (it is deferred) - no need of a 1031 exchange
You can invest in Subchapter S corporations
You can borrow money from the 401K and not pay taxes on the borrowed money
Roll your IRA and 401K plans into your Solo 401K
Contributions to a Solo 401K plan are completely discretionary
Set up a Roth solo 401K and receive your retirement tax free

A Little Background

Setting up your own 401K plan has always been expensive and difficult. There were better retirement savings vehicles to choose from like a SEP IRA. But, just when you thought your government did not love you anymore, along came the Solo 401K and Solo 401K Roth plans. These plans bring retirement planning, real estate investing and tax avoidance to a new level.

How Much Can I Contribute and Avoid Paying Taxes On?

First, you can contribute up to 100% of the first $16,500 of your compensation or self-employment income ($22,000 if you'll be 50 or older at year-end).

Next, you can contribute and deduct an additional amount of up to 25% of your compensation income, or 20% of your self-employment income. This second part of your annual contribution is the same as a traditional small-business retirement plan. The maximum contribution from the employee and employer is $49,000 or $54,500 if you are over 50.

If your spouse works with you (or has their own business), you can put away a total of $98,000 or $109,000 if you are both over 50.

Use Your 401K with the Bank's Money

You can invest the funds in real estate either by themselves, or, you can borrow money from a bank and leverage the 401K funds. With a self directed real estate IRA you would have a tax liability for the portion of the investment that was funded with borrowed money. With the Solo 401K the gain goes right back into the 401K.

Give Yourself a Loan

You may borrow up to 50% of your account balance (up to a $50,000 loan) and repay it over five years (or longer, if the loan is used to acquire a principal residence). Interest is paid back into your own 401k plan at around prime plus 1%. The interest paid is expressly nondeductible, regardless of the purpose of the loan. (You cannot borrow from a SEP-IRA or IRA, but you can roll a SEP-IRA or IRA into your Solo 401k and then borrow from it.)

Defer the Taxes and Eliminate the Need and Cost of a 1031 Exchange

When you sell your investment, the proceeds go back into the plan funds. You do not pay taxes on the gain. When you withdraw and use the money for retirement, you pay the taxes at that time. If you use the Roth option, you never pay taxes on the gain.

Roll Your IRA and Current 401K Into a Solo 401K

You can roll existing accounts into your Solo 401K. This gives you a leg up on accumulating the necessary funds to begin investing.

Contribute Only When You Want To

The contributions are discretionary. This means that you are not required to contribute funds to the plan.

Once you have accumulated enough money in an a Solo 401K, you can go in and out of real estate deals and never worry about the tax consequences. You can buy a house in the morning and sell it in the afternoon and defer the taxes on the gain.

Potential Downsides

Setting up and operating a 401(k) plan involves some degree of paperwork and administrative nonsense. Fortunately, with a solo 401(k), this is only a minor concern, because you're the only participant.

How To Start

You should call me and discuss your situation with me. We have plan administrators who do not charge a lot of money to set these plans up and manage them. I have personally used them for years and they are very professional.