Solo 401 k Plan: How Can You Flip Houses Tax Free?

Solo 401 k plan

Solo 401 k plan

Real estate has always been a lucrative investment and it is considered as one of the most secured choices with higher returns. Entrepreneurs and small business owners often invest in real estate. Are you interested in real estate investments? The good news is that solo 401 k plan allows you to invest in real estate and you can even enjoy tax-deferred gains. Solo 401 k investors can use their plan for investing in commercial, residential, domestic, and foreign real estate. You don’t even need custodian consent for investing in real estate.

Tax-Deferred Gains: Flip Houses with Solo 401 K Plan

If you have never made a real estate investment with solo 401 k, don’t be afraid of the legalities because it’s as simple as writing a check for the property. IRS allows the trustees of solo 401 k plan to make a real estate investment and the property will belong to your plan only. All you need to do is to write a check and purchase the property of your choice.

The best part of flipping houses with solo 401 k is that you can use this money for purchasing the property, repairing it, and even flipping it for property without requiring any third-party consent. Any profit that you make in the deal is tax-deferred and you would be required to pay taxes only at the time of distribution.

How Solo 401 k Plan is different from traditional 401 k plan.

In case of traditional 401 k retirement plans, you need permission from the custodian. Nearly 95% of the custodian won’t allow real estate investments. On the contrary, you have complete control over solo 401 k plan and you don’t need third-party consent for making a real estate investment. The best way to use your retirement funds for real estate investment is to start a solo 401 k and and enjoy solo 401 k plan benefits.

If we average real estate investments with stock market, properties have always performed better and investing in it will ensure best returns for your investments. You can even use the property for rental and then sell the house after a few years. However, make sure to consult a retirement expert or agency to understand different aspect of the process and the best tips for saving maximum tax money. It is time to have complete control over your retirement funds and live a prosperous life even after retirement.

The Pros and Cons of Borrowing from a Self Employed Retirement Account

Self employed retirement account

Self employed retirement account

A self employed retirement account, or a Solo 401k has a unique loan option feature, which allows plan participants to borrow from the account and pay it back later. Like any other financial option, the borrowing decision comes with its own pros and cons. Let’s see if borrowing from your retirement account is a wise decision or not.

Here are the Pros of borrowing from your retirement plan:

1. Borrowing capability: Since it is your retirement at stake, it’s best to put money in the account, instead of taking it out. However, the borrowing option can be a lifesaver at times of difficulties. Some other retirement plans, such as IRA, do not allow this option at all.

2. Penalty free: As individual 401k plans allow borrowing, account holders will not have to pay any penalty on the loans they are taking out.

3. High borrowing allowance: A plan participant can borrow up to $50,000 or 50% of his or her account balance.

4. Long payback period: The plan participant only has to pay back the loan and its interest within 5 years.

5. Interest is paid back to the retirement fund: As the self employed retirement account is the lender in this case, all interest will be directed back into the fund. So instead of paying interest to a bank or another lender, you can pay interest to your retirement fund and still be able to use it in your retirement days.

Here are the Cons to reconsider the borrowing decision:

1. Failure to repay the loan may results in early withdrawal taxes: If the account holder fails to pay back the loan and interest, the loan will be considered a distribution to the account holder. For account holders under 59 ½ years of age and without a Roth account, this can result in an early withdrawal penalty tax.

2. Opportunity cost: When borrowing money from your retirement account, you are taking this money away from investment opportunities and lose any possible return from such investments.

3. Loan fees: Even though all interests are paid back to your retirement account, some plan providers might charge a fee to process the loan application. Therefore, check with your plan provider on any fee or charge that may occur when you borrow from your fund.

In general, the loan option can be an attractive perk of having a self employed retirement account. However, we advise our account holders to consider the points above to decide if it is the right move in their situations.


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Top 5 Solo 401 K Investments for Self-Employed

Solo 401 k tax benefits

Solo 401 k tax benefits

Solo 401 k is one of the best retirement plans for self-employed not just because of its tax benefits and retirement cover it offers but because of the wide investment opportunities it provides. All of this along with complete control over your investment and no need of consent from the custodian. There are over a dozen investments that are allowed within your solo 401 k; however, some outmatch others and we are going to discuss them.

Real Estate

There is no doubt that real estate is one of the top choices among all the available investment categories. As per the IRS rulings, you can invest in real estate land and it is as simple as buying a property with a check. The property gains are tax-deferred and in case you have a Roth solo 401 k plan, you can enjoy all the profit at the time of retirement. Any profit that you make on the property goes directly into your retirement plan.

Investing in Private Businesses

Do you pay attention towards private business and invest in them? You are free to purchase a part or interest in a private business. However, make sure to keep IRC 4975 ruling and avoid Disqualified Person or any Prohibited Transaction in your way. You should ask for professional help and get the best possible solo 401 k tax structure for your investments.

Investing in Foreign Currencies

Investors made a considerable amount of money by investing in the Japanese Yen over the past few years. Are you interested in foreign currencies? The good news is that you can invest in foreign currencies with your existing solo 401 k plan. Foreign currency investments are known for earning opportunities and the advantage of liquidity over other investments. Your Forex gains are tax-deferred until distribution and tax free for Roth solo 401 k plans.

Tax Liens

You can purchase tax liens and tax deeds with your solo 401 k. Any profits generated out of your purchase are tax-deferred and you can pay taxes at the time of distribution (70 years age or earlier). You get Checkbook Control with your plan, which allows you to invest pretty much anytime you see an investment opportunity.

Investing in Coins and Precious Metal

Precious metals and coins have offered a hedge against inflation and other market nightmares. They tend to increase in value with the rate of inflation, which makes them an idea investment. You can even deposit them against the name of your solo 401 k in a safety deposit locker.

Self Employed Business Owners to Receive Tax Benefits from Individual 401 K Plans

Individual 401 K Plans

Individual 401 K Plans

Self employed business owners are often aware of tax charges that cut into their profit and income. The good news is, small businesses can save a lot on taxes with individual 401 k plans. The retirement plan earned its title as one of the best 401k plans for small business for many benefits, such as self-directed option with checkbook control, no minimum contribution required, and the option to borrow from the retirement fund. However, most account holders are attracted by its tax-saving benefits, and here is why:

Tax-deferred or tax-free account:

With an individual 401 k, account holders can put up to $56,500 into their retirement fund every year. This is among the highest contribution limits of retirement plans. The reason is that with an individual 401 k, the owners are seen both as the employee and the employer of the one-man operation. A higher contribution limit means account holders can shelter more of their income into the fund and don’t have to pay tax until their retirement age.

An individual 401 k account can also be a Roth account, or have a Roth sub-account. With this option, account holders can pay taxes for their contribution amounts this year, and let it grow tax-free in their retirement fund.

Tax deductible contributions

Besides the tax benefit on their contributed amount, account holders can also claim these contributions for their business. Any other corporation would be able to claim tax deduction for their contributions to employees’ retirement fund. Similarly, a self employed business owner with no other employee can also claim tax deduction on contributions to his or her own retirement fund.

Not only that, if there is any trustees’ fees not covered by the contributions, business owners can also deduct these amounts.

How much is deduction limit and how to claim deduction?

The IRS Publication 560 has provided instructions to calculate the deduction limit for self-employed individuals.

The amounts can be deducted on Form 1040 for sole proprietorships, Form 1065 for partnerships, or Form 1120S for corporations. If you need further assistance, contact your accountant or plan provider for support with tax-related issues.

Overall, an individual 401 k plan is a great solution for small business owners who are looking for available tax benefits. Not only it reduces the tax bills, but also helps you gather the money needed for retirement.


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Invest in Real Estate with Solo 401 k Plans

solo 401 k plans

Solo 401 k plans

Are you self-employed? With better awareness among small business owners about their retirement, self-employed individuals and small business owners take different types of retirement plans and solo 401 k plans are quite popular among them. Solo 401 k offers an easy method to invest in retirement funds and you can save money on taxes with these investments. It is an IRS approved plan and it offers more investment opportunities to the account holders. If you are interested in real estate investment, solo 401 k plans are perfect for you.

Choose solo 401 k Plans for Real Estate Investment

Solo 401 k allows you to get ahead of the traditional stock market investments, bank CDs, and mutual funds. It allows you to invest in real estate and this section will discuss some important benefits of investing in real estate with solo 401k.

Unlimited Investing Options

With solo 401 k, you can invest in real estate as per the regulations of the ERISA (Employee Retirement Income Security) ACT and the only exceptions include transactions made by a disqualified person and investments in collectibles.

What are the different kinds or properties that you can invest in with?

  • Commercial Properties
  • Multi-family apartment buildings
  • Raw land
  • Residential properties
  • Condominiums
  • Single family property (rental purpose)
  • Townhomes

The process of investing in real estate with solo 401 k plans is quite similar to the regular property transactions. It is possible to invest in other real estate financial tools including tax deeds, mortgage notes, and tax liens. The property is purchased against the name of the solo 401 k plan and the account trustees have to sign on behalf of the plan. Every expense associated the transaction is covered by the plan. Similarly, any interest made with the investment is paid to the solo 401 k plan only.

In case of difficulty in regular payments, it is possible to get a non-recourse loan or sell the property to another non-disqualified person. The cost is divided between both the partners with depending upon their share in the property.

Provision of Loan with solo 401 k plans and tax-free gains

Under the benefits of solo 401 k, you can borrow a loan from the plan for any purpose and the amount should not exceed 50% of the fund amount up to a maximum of $50,000. Investing in real estate with solo 401 k allows you to enjoy tax-deferred gains with your property. Your money is sheltered from taxes.

In addition to these benefits, making investments is under the control of the plan participant and it is up to them to make appropriate investments for their future.

All You Need to Know about Solo 401k Contribution

Solo 401k contribution

Solo 401k contribution

As with any other retirement plan, you can’t take full advantage of the tax benefits of a Solo 401k without making enough contributions to the plan. It’s the middle of the summer already, are you behind on your contributions? How much should you contribute? And is there any rule you need to know? Let’s go over the most asked questions about Solo 401k contribution and find out what you need to know about contributing to this retirement plan.

Who can contribute to a Solo 401k plan?

This retirement plan is created as a 401k plan for small business, with only the self employed owner and no other employee. Freelancers, private consultants, or doctors with private practices also qualify as self-employed individuals. Please note that if the person’s spouse is involved with the same self-employed activity, he or she can also make contributions to the plan.

How much can you contribute?

Account holders can contribute up to $17,500 as salary deferral, $23,000 if they are over 50 years old. A profit sharing contribution is also allowed, up to 25% of the earned income from the business. The total contribution is limited to $56,500 annually. To find out exactly the how much you can contribute, check out our contribution calculator.

Is that the highest contribution limit among retirement plans?

The unique aspect of a Solo 401k plan is that it allows two types of contribution, as salary deferral and as profit sharing. Some other retirement option, such as SEP IRA also limit the contribution to $51,000 per year, which is closer to the limit of a Solo 401k. However, a SEP IRA only allows profit sharing contribution at up to 25% of the earned income from the business. So for those who haven’t reached the maximum limit of $51,000, a Solo 401k plan can potentially allow you to put more into your retirement savings.

When should I make contributions?

We recommend our account holders to go through the contribution deadline carefully. As a general rule, you have to have your Solo 401k by December 31 in order to make contribution to the plan in the next year. All contributions have to be made before tax-filing deadline in order to qualify.

 Can I contribute to two different retirement accounts?

A person only needs a self-employed income to qualify for a Solo 401k plan, no matter whether it is from a part time or full time activity. Therefore, there are situations when a person has a 401k with their full time employer, and also a Solo 401k for their self-employed activity. In that case, you can use salary deferral with your employer to contribute to the regular 401k, and your self-employed income for Solo 401k contribution.


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Become the Trustee of Your Individual 401 k

Individual 401 k

Individual 401 k

With a traditional 401k, account holders often have their retirement fund managed by a custodian service company. With an Individual 401 k, however, account holders can choose to act as the trustee of their own plan. Let’s take a look at how becoming a trustee can benefit account holders.

Lower cost and fees

As with any other service, a trustee will charge a fee for the time and effort they spend on managing the fund. When account holders spend their own time making decisions regarding the fund, there will be no cost associated with that.

Personalized portfolio

As the trustee of their own Individual 401 k, account holders are able to hand pick different assets they want to invest in, and not limited to only stocks and bonds. A trust company or a bank would more likely to restrict investment options to products they offer, or prioritize their products. Account holders, on the other hand, only have their own interest at stake and will be able to consider the best options to fit their investment goals.

Time-sensitive Investments

Since the trustee is the manager of retirement plans, account holders are required to get approval from a trustee before making any changes to their investment. When the account holder is also the trustee of the fund, this approval process is eliminated. Thanks to that, it simplified the process. For certain assets, quick decisions also mean account holders will be able to catch better deals, which they would have to miss otherwise.

How to become the trustee of your individual 401 k

These three reasons above make self-directed individual 401k an attractive self-employed retirement plan. By taking charge of their plans, experienced investors can grow their fund and reach their retirement goals much faster than having it taken care by someone else.

Keep in mind that not all individual 401k plans allow account holders to act as the trustee. Often, banks, trust companies, or other financial institutions will offer individual 401k plans that require custodian services. In order to become a trustee of your individual 401 k, you will need to make sure your retirement plan is truly self-directed.

Also, once you act as the trustee of the retirement plan, it is your responsibility to make sure the plan and its investment are in full compliance with IRS regulations and applicable laws. This requires research on your own, or make sure your plan provider offers services and supports you needed.


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