Solo 401k Benefits
Or Why Would I Want a Solo 401k?
If you’re reading this, the likelihood is you’ve heard about one of the unique benefits a Solo 401k has to offer and want to learn more.
Whether you’re a savvy investor or new to saving for retirement, the Solo 401k is an ideal investment vehicle for solo entrepreneurs and small business owners looking to get the most from their investment.
But despite the fact that the Solo 401k has been around for nearly two decades, it’s remained relatively unknown even to experienced investors, tax attorneys, and CPAs for decades. Only recently has it begun to get the attention it deserves. For that reason, most are unfamiliar with the specifics of the plan and the unique benefits it offers to self-employed individuals.
So then, what makes the Solo 401k such an amazing retirement and investment option for solo entrepreneurs and the self-employed? There are 4 major benefits that put the Solo 401k in a class of its own:
4 Benefits of investing in a Solo 401k / Why you should invest in a Solo 401k
1. Higher contribution limit
Compared to most other retirement accounts, the Solo 401k’s contribution limit is much higher. How much higher? Potentially five to ten times higher in a given year depending on various factors when compared to other traditional retirement accounts.
The Solo 401k also offers a lot of flexibility in how you contribute as well. Contributions can be either pre-tax or after tax (Roth). In addition, the plan allows for two types of contributions: employee deferral contributions and profit-sharing contributions which can be combined to reach the maximum total contribution.
For example, if you made $125,000 of self-employment income in 2017, your maximum contribution limit for both a Roth and self-directed IRA would be $5,500 ($6,500 if you’re over 50). In contrast, with a traditional 401k, you could contribute a maximum of $18,000.
However, with a Solo 401k, you can make employee deferral contributions up to a maximum of $18,000 just like a traditional 401k as well as a profit-sharing contribution, depending on your incorporation status, of up to 25% of your income for the year for a maximum contribution of $54,000.
Going back to our example, on top of your $18,000 employee deferral contribution you could also do a profit-sharing contribution of $31,250 (25% of $125,000) for a whopping total contribution of $49,250 for the year of 2017.
2. Cash on demand with flexible loans
Personal loans are another powerful feature available for Solo 401k plan owners that are unavailable to you with other retirement vehicles such as a self-directed IRA.
But it’s not a long drawn out process with heaps of paperwork and steep interest rates. Instead, it’s super easy and convenient to borrow from a Solo 401k:
- It takes just minutes to process a loan request
- You’re instantly approved online for up to $50,000 or 50% of the account value (whichever is less)
- You set the interest rate and can take up to 5 years to pay off the loan, with repayments only required every quarter (in addition, you can extend the loan repayment window if you’re using the loan to purchase a primary residence)
- And you can use the funds for any purpose including paying off a debt, mortgage, personal emergency, and even purchasing a new primary residence
It’s important to note that this loan feature is not available to you with most financial institutions. Most institutions don’t offer the feature because it’s less advantageous for the institution due to higher administrative costs and the lower account balances that result from offering loans. However, this loan feature is included in Maverick Solo 401k at no extra charge.
The ability to easily and conveniently borrow from your Solo 401k greatly adds to the utility of the account, especially considering the account is designed for self-employed people who can make use of the funds for unforeseen business expenses or personal emergencies when business funds are low.
3. Powerful investment options
With a Solo 401k, you not only have access to many varied and powerful investment options, those options are much more accessible when compared to other traditional retirement and investment accounts.
With a Solo 401k, you can invest in several powerful and unique options, most notably:
- Real estate
- Stocks, bonds, and ETFs
- Precious metals (including gold and silver)
- Private equity
- Private debt
- Life insurance
In addition, the ease and accessibility you get when investing with a Solo 401k are unmatched, with the ability to partake in various investment options with less hassle, fewer fees and delays, and more protection for your assets:
- No LLC required: Unlike other retirement accounts, there’s no need to obtain an LLC status to invest in real estate. Obtaining and maintaining an LCC can be very costly and time-intensive, therefore a Solo 401k allows you the benefit of a simplified path to investing.
- Bypass custodian approval: Unlike most other retirement and investment accounts, with a Solo 401k, there is no custodian or trustee to preside of your account. Because of this, you’re able to bypass the expenses and delays which occur when attempting to make investments with an account that requires a custodian.
- Invest in real estate with non-recourse business loans: With a non-recourse business loan, you can invest in real estate while bypassing the UBTI (Unrelated Business Taxable Income) tax. In addition, you can protect your Solo 401k assets in the event that a debt must be settled. With a non-recourse business loan, in the event of a default or foreclosure, the lender can not go after the plan owner or the Solo 401k account balance in an attempt to repay the loan, only the property itself.
With the above features and benefits taken into account, the result is a simple and easy way to invest your money in a variety of powerful asset options with no hassle or headache.
Benefit 4: Easy account set up
In addition to offering high contribution limits, flexible loans, and unique and varied investment options a Solo 401k is easy to set up.
Because you essentially serve as the custodian or trustee of your Solo 401k plan, as opposed to an outside party in the case of most IRAs and 401k plans, several aspects of the account set-up process and maintenance are simplified. This includes:
- Low set up costs
- Minimal paperwork and the ability to input your information online, saving you time
- The elimination of processing and holding fees
- Reduced processing time for things such as investing (especially useful when you’re investing in something like real estate and need to make an offer fast)
- Open an account without leaving your home online and within a matter of minutes with our banking partner.
- We register the tax ID for you, typically within a matter of minutes. No need to navigate the confusing IRS website.
Before Maverick, setting up a Solo 401k plan required a ton of paperwork, signatures, scanning documents, additional paperwork, more signatures, registering with the IRS, and more.
Now, with Maverick, your end of the setup process has been simplified and can even be completed entirely online if you so choose (we take care of the rest).