Solo 401k - The Most Incredible Investment Vehicle You’ve Never Heard Of

Last week’s blog post provided an overview of the 401(k) options that are out there. Effectively, most 401(k) options allow you to invest your hard-earned money into a qualified investment meeting basic 401(k) requirements. With each plan, as we’ve discussed, there are risks. For the most part, traditional 401(k) options are a safe way to invest, but there are other options, that if you are willing to take the risk, could reap great rewards for your future.

In continuing our money series this week, I wanted to take a closer look at the power available to you in the Self-Directed 401(k), also known as a Solo 401(k).

Specifications: A Solo 401(k) is a fairly young retirement option, created in 2001, designed primarily for the self-employed and owner-only businesses or partnerships. You can qualify for this plan if you have no full-time employees, other than you (business owner) and/or your spouse. If you have part-time employees, they must work less than 1000 hours per year and they do not need to be included in the 401(k). The plan must be set up by Dec. 31 of the current year and has minimal setup fees.

Benefits: Benefits include salary deferrals up to $18,000 for 2017, plus an additional $6000 if over 50 years of age. It also allows for profit-sharing contributions for up to 25% of your compensation (maximum $54,000 for 2017). You may borrow up to $50,000, which you can then use to further invest (or for any reason for that matter), all offered to you tax-free. You will act as your own trustee of the account, giving you “checkbook control” over your own assets (check IRS for transaction restrictions). As the trustee, however, you are prohibited from benefiting directly from your trust and you cannot combine personal money with the trust. Another added advantage is there is very little administrative maintenance: only an annual IRS Form 5500 is required.

Investment Options: The Solo 401(k) greatly widens your investment options, including but not limited to, stock options, mutual funds, notes, startup businesses, etc. If you decide to go with this option, you might consider real estate investments (residential or commercial), and let me explain why. This plan allows you to invest in tax-deferred real estate investments, meaning income from these investments will then flow back into your retirement plan, tax-free until you take a distribution. Talk about kicking your retirement plan into hyper-drive!

Consider the following example: John Smith is a 48-year old business owner with no employees, who sets up a Solo 401(k). His net earnings total $150,000 and he decides to defer the 2017 maximum of $18,000. Additionally, the business is allowed to deduct contributions up to 25% of his total compensation ($37,500). Both equal more than the $54,000 allowed contributions (since he is under 50 years of age) so the business adjusted compensation to $35,000 (so as to not exceed $54,000).

Once his account was set up, John started investing right away. Taking advantage of the low home prices in his area, he invested in a $30,000 property, using cash from his Solo 401(k), turning it into a rental home, which he now rents for $850/month. He then bought a $16,000 home, spending $4,000 to fix it up. He can now rent this property for an additional $700/month. He must deposit all rental income back into the plan and use it to pay all other rental expenses, but all income flows back into his account and will essentially be valuable, continued earnings for his future retirement.

This is what it means to make your money work for you.

There is great value in saving your dollars, tucking them away into a savings account, which I discussed in the first post in this money series. Saving is critical, however, the most wealthy people don’t get that way by saving only. Investing and focusing on ways to generate income is the real key to producing more wealth. The Solo 401(k) is one way to do just that.

A quote taken from an article entitled “Building Wealth” written by Lester C. Thurow, professor of management and economics at MIT, explains real wealth this way:

Real wealth is the ability to produce more with less -- to generate a flow of goods and services without having to sacrifice something else of equal value. It is not created by taking time away from other activities and devoting it to money-making. . . Real wealth is ultimately not created by taking income away from consumption and devoting it to investment; it flows from increases in capital productivity -- getting more out of the same capital resources or using fewer capital resources to generate the same levels of market wealth.”

The Solo 401(k) option is built around generating wealth. Invest in it now, if you are able, and reap the rewards long after retirement.

Let Me Know: Do you have a Solo 401(k) and how has it benefited you in generating wealth?

Written by Mike Williams

I am a serial entrepreneur with more than 20 years of business experience. My goal with this blog is to pass on some of what I have learned in order to help you achieve success in business.

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