Independent real estate agents or investors will often have to look for a self employed retirement plans on their own, as their flexibility schedule and work place often do not come with an employer sponsored retirement plans. Having a proper self employed retirement plans in place is not only a great way to save for the future, but also brings about certain tax benefits.
When considering retirement options for self employed individuals, most people often think of the Solo 401k and the self-directed IRA LLC first. These two plans both offer tax benefits to plan holders but each has its own unique features.
Self-directed IRA LLC
A Self-directed IRA LLC is a retirement plan that gives account holders the ability to self-direct their investments. That means they will not need to get approval from their custodian to complete a transaction. This save account holders on custodial or transaction fees, while helping them catch time-sensitive opportunities.
Having a self-directed IRA LLC is a plus for real estate investors as it allows them to invest in real estate properties, trust deeds, mortgage notes and more. Plus, as with traditional retirement plans, account holders will also have receive tax-deferral or tax-free benefits from a traditional or Roth IRA account.
Solo 401k – one of the most popular self employed retirement plans
The Solo 401k is one of the self employed retirement plans that offer the same benefits as an IRA, plus more. The biggest advantage of a Solo 401k over an IRA is its high contribution limit. In 2015, plan holders will be able to contribute up to $53,000 a year, almost 10 times higher than an IRA. This gives plan holders a quicker way to grow their retirement funds and invest in large properties or investments.
The structure of a Solo 401k is also simpler. An IRA has to have a qualified custodian to manage the account. Therefore, to set up a truly self-directed IRA, often the account still needs to be opened with a custodian, who will set up and invest the fund in an LLC, which is then handed over to the plan owner to manage. This set up process can be skipped entirely with a Solo 401k, which does not require a custodian and allows plan participant to become a trustee of the plan.
Another advantage that a Solo 401k has over an IRA is its ability to use non-recourse financing to purchase real estate properties. While doing so is possible with a self-directed IRA LLC, the financed investment will be charged with the unrelated business income tax. This does not apply to a Solo 401k however. Therefore, account holders can use leverage in their investments.