real estate investingFor small business owners, sole proprietors and independent contractors, a Solo 401k plan is a perfect investment option.  Any business (including sole proprietorship, LLC, corporation, or partnership) with no employees other than the owner(s) may adopt this plan.

A Solo 401k plan offers advantages similar to a Self-Directed IRA LLC (or Checkbook IRA), but without the added steps of hiring a custodian or creating an LLC.

What makes the Solo 401k so popular is that it’s explicitly for small, owner-only businesses. This cost-effective, tax-efficient investment plan offers the benefits of a Self-Directed IRA plan, and includes additional advantages.

What in particular makes the Solo 401k Plan so appealing for self-employed business owners?

Checkbook Control:

You serve as the trustee of your Solo 401k Plan, which gives you “checkbook control” over your assets.  Making an investment is as simple as writing a check. As well, you do not need to hire a bank or trust company to serve as your trustee – which means that all assets of the 401k trust are under the sole authority of the participant. By letting you eliminate the expense and delay associated with a custodian, a Solo 401k plan lets you respond quickly when the right investment opportunity presents itself.  And because the plan’s trust account may be opened at any bank, you won’t have to pay custodian fees for the account as you would with an IRA.

High Limits for Contribution:

While an IRA allows only a $5,000 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), Solo 401k annual contribution limits go up to $55,500.  If you husband or wife generates compensation from your business, that spouse can also contribute to the Plan.

Under 401k contribution rules effective in 2012, a participant under 50 years old may make a $17,000 maximum employee deferral contribution, made in either pre-tax or after-tax dollars (Solo 401k come with build-in Roth sub-account). On the employer side (profit-sharing component of contributions), the business can make a 25% (20% for a sole proprietorship or single member LLC) profit-sharing contribution up to a combined maximum, including the employee deferral, of $50,000.

Plan participants age of 50 and above can make a $22,500 maximum employee deferral contribution, also with the option of pre-tax or Roth dollars. The business can make a 25% (20% for a sole proprietorship or single member LLC) profit-sharing contribution up to a combined maximum, including the employee deferral of $55,500.

While you may choose to shelter a large portion of your income, contributions to a Solo 401k are completely discretionary. You always have the option to contribute as much as legally possible, but can also reduce or even suspend plan contributions as necessary. In other words, you can contribute to your plan, but are not required to do so.

Choice of Investment Options:

As a Solo 401k Plan participant, you may invest in real estate (residential rentals, commercial, tax deeds, tax liens, foreclosures, raw land etc.) private businesses, precious metals and hard money lending as well as stock and mutual funds; in fact, your options are limited only to your imagination. The investment income will flow back into your Solo 401k Plan tax-free. As trustee of the Solo 401K Plan, you simply write a check and then have total control over your assets to make tax-free investments without custodian approval.

Roth Sub-Account:

People with IRA, who earn high incomes, are disallowed from contributing to a Roth IRA.  The Solo 401k plan contains a Roth Sub-Account, to which you many contribute without income restrictions. This sub-account lets you make Roth-type contributions while making significantly greater contributions than with an IRA.

Loan Feature:

While an IRA offers no participant loan feature, the Solo 401k allows you to borrow up to  $50,000 or 50% of the account value (whichever is less) at a low interest rate (the lowest interest rate is Prime, which is 3.25% as of January 1, 2012). So as a participant, you can easily access up to $50,000 for any purpose, including paying personal debt or funding a business.

UBTI Exemption:

When an IRA uses mortgage financing to buy leveraged real estate, this triggers Unrelated Debt Financed Income (UDFI) – a type of Unrelated Business Taxable Income (UBTI) on which taxes of about 35 percent must be paid. But with a Solo 401k plan, you can use leverage without being subject to the UDFI rules and UBTI tax. This exception offers major tax benefits to buy leveraged real estate.

Combine Multiple Accounts:

Your Solo 401k plan accepts rollovers from another retirement plans such as an Traditional IRA, SEP IRA, or a previous employer’s 401k, 457 or 403B. Thus, you can directly rollover your IRA or qualified plan funds to your new Solo 401k Plan. The exception: Roth IRA funds cannot be rolled over.

Cost-Effective Administration:

Solo 401k plans are easy to operate. They require no annual filing unless your plan exceeds $250,000 in assets, in which case you will file (Form 5500-EZ) with the Internal Revenue Service.

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