By Reneika Lightbourne

A solo 401(k) is an IRS-approved qualified retirement plan designed to help self-employed workers or business owners save and invest for retirement. Otherwise, called an individual 401(k) or uni-k, a self-directed solo 401(k) is one of the most powerful tax-advantaged investment vehicles available to self-directed investors. Profits flow into the account tax-deferred or tax-free and, coupled with the ability to self-direct a universal list of alternative assets, the self-directed solo 401(k) becomes a near picture-perfect solution to building retirement wealth.

So, how does a Solo 401(k) plan work, precisely?

A solo 401(k) adheres to the same guidelines and is allotted the same advantages as a traditional 401(k) while allowing you to maximize your retirement contributions, with lesser administrative cost and the greatest flexibility. Solo 401(k) accounts allow participants both employee and employer contributions. This can result in individuals putting away significant amounts of capital: as much $57,000 if you’re under the age of 50 and up to $63,500 if you are 50 and older.
There are no age or income restrictions on self-directed solo 401(k)s, but you must meet certain eligibility requirements. To qualify for a solo 401(k), you must:

Show earned income whether you are an independent contractor, sole proprietor, LLC, S Corporation or C Corporation. 

Have no full-time employees, defined as individuals who work more than 1,000 hours annually, are over 21, and have worked three consecutive years. 

Readers should note, however, that the solo 401k does permit spouses and business partner(s) to partake in the plan.

Three key benefits of the Solo 401(k) Plan

There are many things self-directed investors love about self-directed solo 401(k) plans. Here are three key benefits that nearly every investor cites as compelling reasons to have this type of account if you can do so:

1) Control over Investment Funds:
As the trustee, you garner optimal flexibility and control over your investment choices. Self-directing your 401(k) gives you access to a new source of funding, lessening the need to take out a loan or tap into personal savings. Investing opportunities are plentiful, and include (but are not limited to) real estate as rentals or rehab projects, tax liens, private equity, peer-to-peer lending, precious metals, and foreign and cryptocurrencies. This diversity enables self-directed investors to diversify their portfolios and safeguard against volatility in the stock market. 

Don’t Forget:Per IRS rules, life insurance and collectibles are the only two types of investments you cannot purchase in your retirement account.

2) Borrowing from Your Solo 401(k) Plan:
One of the most popular features of the solo 401(k) is the account holder’s ability to borrow personally from the plan. The maximum loan you can take from your solo 401(k) account is $50,000 or 50% of the value of the account, whichever is less. Ordinarily, the tax-free loan must be repaid within 5 years.

3) No Unrelated Debt-Financed Income Tax (UDFI) on Leveraged Real Estate:
Unlike IRAs that are subject to UDFI if debt is used to finance and purchase real estate, a Solo 401(k) is exempt from UDFI taxes. 

For example, in an IRA, 123 Main Street costs $100,000. If the IRA puts $20,000 as a down payment and takes out a non-recourse loan (no personal guarantees) for the remaining $80,000, 80 percent of the net profits will be subject to taxes and the other 20 percent in profits will be tax-free. In a solo 401(k), there are no UDFI liabilities. This means 100 percent of the net income will go into the account even though debt-financing was used in the purchase that asset.

Reneika Lightbourne is an employee of Advanta IRA, one of the nation’s top self-directed plan administrators. She has a working knowledge of how beneficial Solo 401k plans are as a facilitator of the administration of these accounts. Contact Reneika Lightbourne at 678-513-8913 or email to learn more about Solo 401(k) or to opening an account.