Self Directed Solo 401(k) Plans

Are You Really in Control of Your Individual Retirement 401K Plan?

Many of us have had or now have 401(k) plans through our former or current employers. These plans are setup to allow companies to have retirement plans that are pre-tax; that is, you set aside a portion of your income and tell your company how you want it invested. For example, your employer will typically signup with a brokerage company or mutual fund house and offer a select number of mutual funds or other public investments. Oftentimes, your employer will match a percentage of what you invest so you not only get an excellent deduction, but your company matches some of the money you put in and hopefully your investments grow in value.

Well, as you might guess that last comment is the sticking point. “Hopefully your investment grows in value.” How many times have you looked at your statement and wondered should I switch from the technology fund to the growth fund and what percentage should I have in the S&P Fund or the value fund. To put it bluntly, the choices are limited especially if you are not a fan of mutual funds.

Anyway, I like everything about 401(k) plans except what you can invest in. That is why I am excited to tell you about self-directed solo or individual 401(k) plans. These plans are designed to give you the benefits of a 401(k) account while allowing you to choose where you want your investments to flourish.

Okay, so how does this work? Well, if you or your spouse earn income through self-employment, as a sole proprietor, partnership, LLC, corporation or as an independent contractor without any employees, then you are eligible for this unique retirement plan.

Like IRAs, you must decide whether you will tax defer your income or use the Roth alternative and delay your gratification for a potentially huge tax-free windfall.

Roth versus Traditional:

Roth Solo 401(k) plans allow you to set aside up to $15,500 for year 2007 or $20,500 if you are over 50. With the Roth alternative, you will not be able to set aside a portion of your revenue; however, many planners recommend using both a Roth and a Traditional solo 401(k). The first portion of your income goes to the Roth and the rest goes to your traditional solo 401(k).

Why Roth?

Imagine, buying an investment like a tax deed for $4,500 and selling it for $50,000 without paying any taxes on the capital gain.  Imagine purchasing a short sale foreclosure for only $9,000 (it’s possible in some locations) and selling it for $76,000 without paying any taxes. Or, imagine buying a piece of paradise (beach front property for only $50,000 and selling it for over $120,000 all tax free. Your Roth can make this happen and the benefit of a Roth 401(k) is you can set aside about three times more than you can with a Roth IRA. Remember, you can’t take an immediate tax break with a Roth, but your benefit comes later when you pay no taxes on the interest, income or capital gains of your investment.

Why Traditional?

With a traditional 401(k) your contribution is deducted from your adjusted gross income and you receive a nice deduction on your current taxes. For example, if you made $76,000 and you set aside $15,500, then your new adjusted gross income is only $60,500. Or in simple language, you are not taxed on the $15,500. This can be a real life saver when April 15^th (tax day) rolls around plus it is a forced way to save. Now, when you withdraw this money during retirement, you will be required to pay taxes on it plus any interest earned.

So what are the requirements for a Solo 401(k)?

1. You must establish an account before the end of the tax year.

2. You can begin taking distributions at age 59.5. You are required to take distributions at age 70.5 with a traditional solo 401(k) plan.

3. You cannot contribute more than you make.

4. Your income must be 1099 or W2 income; it cannot be distributions, such as K1 income.

5. For tax year 2007, you can set aside up to $15,500 in income plus 25% of revenue from a business or 20% from a sole proprietorship. Your spouse can set aside the same amounts. If you are over 50 years old, you can set aside an extra $5,000 in income per spouse.

6. You must hold it in the plan for at least 5 years.

If you know anything about IRAs, already you will recognize that you can set aside more money by far in a solo 401(k) plan than an IRA. Currently, the limit for IRAs in year 2007 is $4,000 or $4500 if you are over 50 years old.

What you can’t do:

1. Invest in, sell to, lease to or exchange property with a disqualified person. Who is disqualified?

a. You, your spouse, mother, father, kids, grandparents or any person you designate as a beneficiary.

b. Use your 401(k) for certain investments, but the requirements are not as stringent as IRAs.

c. Use your 401(k) as collateral for a loan.

d. You or a disqualified person cannot receive a benefit or goods or services from your 401(k).

e. Invest in a business that you own more than 50 percent or that a combination of you and/or disqualified persons own greater than 50 percent.

The fees to setup a self-directed 401(k) account range from about $50 to $250 per year with a setup fee of about $100.

While there are Administrators who will help you setup a solo or individual 401(k) plan, most are brokerage houses that will limit your investments to stocks, bonds and mutual funds.

Here is what I really like about Solo or Individual 401(k) plans:

·         You can borrow up to 50% of your plan’s value usually up to a maximum of $50,000.

·         You can self-direct your plan and set it up with check book control.

·         You can invest in S-corporations and other some other investments not allowed through your IRA.

·         You can set aside more money tax free and/or tax deferred than in an IRA.

·         There are no income requirements to qualify, like IRAs.

·         You can obtain a non-recourse loan for buying real estate without triggering the unrelated business income tax (UBIT) rules like IRAs.

Self-directing your retirement monies and taking control of your investments is one of the best ways I know of securing your retirement future.

For more information on setting up your own account, visit this link: Self Directed Retirement accounts

Real Estate in an IRA?

Buy tax lien certificates using your IRA.

Learn how you can earn 18% to 240% per year investing in tax foreclosed properties and tax lien certificates using your self directed IRA. For more information, visit Rogue Investor.