By Jeffrey Dixon, MBA, CISP, SDIP

Are you self-employed and have no full-time employees, other than yourself?  If your answer is “yes”, consider opening a Solo 401k account.  Self-Directed 401k options make this retirement account very beneficial for self-employed people.

Self-Directed 401k options include:

  • High contribution limits

The Solo 401(k) allows a business contribution and a personal contribution. The max business contribution is the lesser of 25% of business income or $62,000 for 2022 combined. The business contribution is pre-tax. The maximum personal contribution as a participant of the plan is $20,500 ($26,000 if over 50). The personal contribution can be either pre-tax or after-tax (Roth). A spouse is also allowed to make this contribution to their own retirement account in the 401k. As a result, a married couple co-owning a business can save up to $124,000 in the 2022 tax year and likely have a healthy tax break.

  • Numerous investment assets that can be acquired

There are many different assets your Solo 401k can invest in. It can acquire rental property and raw land. You can make loans to people or businesses. You can investment in other people’s businesses. Precious metals, tax liens and cryptocurrency are also Self-Directed 401k options. Here is a link to investment options. Click HERE

  • Ability to use financing when buying real estate

Because the 401k plan can use a non-course loan to buy real estate, you can grow your retirement savings with debt. You are not allowed to personally guarantee this loan. Should there be a default on the loan, the bank can only foreclose and take the property back to try to sell and recoup the loan funds. The bank cannot go after you personally, or any other assets within the self-directed retirement plan that owns the property that borrowed the money. And you do not personally sign for the loan.

  • Generally, exempt to Unrelated Debt Financed Income taxes (UDFI)

IRAs are subject to a tax when they buy real estate and use financing. The Solo k is exempt to this tax if the loan is for purchase or home improvement.

  • Take a personal loan from the 401k account

You can take a loan of 50% of the cash value of the 401k account or $50,000, whichever is less. This must be paid back over a five-year period.

  • Take distributions starting at 59 ½ without penalty

Taking a distribution from the account before the age of 59 ½ means you will pay a 10% penalty for an early distribution as well as income taxes.

FINAL THOUGHTS:

Consulting a tax professional when deciding between retirement plans (or any decision regarding a retirement account) is a very good idea.  Feel free to contact us if you have questions about this or any IRA-related topic. We can be reached at (866) 447-6598 or info@uDirectIRA.com.

 

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