SOLO 401(k) ADVANTAGES
High Contribution Limits
$52,000 (or $57,500 if over the age of 50). While an IRA only allows a $5,500 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), the Solo 401(k) annual contribution limit is $52,000 for 2014 with an additional $5,500 catch-up contribution for those over age 50. In addition, if your spouse generates compensation from the business, he or she can also make high contributions to the plan.
A World of Investment Opportunities
With a Solo 401(k) plan, you will be able to invest in almost any type of investment opportunity that you discover, including real estate (rentals, foreclosures, raw land, tax liens etc.), private businesses, precious metals, hard money and peer-to-peer lending, as well as stock and mutual funds; your only limit is your imagination. The income and gains from these investments will flow back into your Solo 401(k) Plan tax free.
While an IRA doesn’t offers participants a loan feature, the Solo 401(k) allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose at a low interest rate. (the lowest interest rate is Prime which is 3.25% as of February 1, 2014). This gives a Solo 401(k) Plan participant the ability to access up to $50,000 to use for any purpose, including paying personal debt or funding a business.
Flexible Contribution Options
Contributions to a Solo 401(k) plan are completely discretionary. You always have the option to try to contribute as much as legally possible, but you also have the option of reducing or even suspending plan contributions if necessary. In other words, you have the ability to make contributions to your Solo 401(k) plan—up to an aggregate amount of $50,000 if you are under the age of 50—but are not required to do so.
With IRAs, those who earn high incomes are disallowed from contributing to a Roth IRA or converting their IRA to a roth IRA. The Solo 401(k) plan contains a built-in Roth sub-account which can be contributed to without any income restrictions. With a Roth Solo 401(k) sub-account, you can make Roth type contributions while having the ability to make significantly greater contributions than with an IRA.
COST EFFECTIVE ADMINISTRATION
In general, the Solo 401(k) plan is easy to operate. There is generally no annual filing requirement unless your Solo 401(k) plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).
Exemption FROM UDFI
When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (UDFI)—a type of Unrelated Business Taxable Income, also known as UBTI or UBIT, on which taxes must be paid at an approximate rate of 35%. But, with a Solo 401(k) plan, you can use leverage without being subject to the UDFI rules and UBTI tax. This exemption provides significant tax advantages for using a Solo 401(k) plan versus an IRA to purchase real estate.
Retirement Saving Consolidation through Rollovers
A Solo 401(k) plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP, or a previous employer’s 401(k) plan. Thus, you can directly rollover your IRA or qualified plan funds to your new 401(k) plan for investment or loan purposes. The exception is Roth IRA funds which cannot be rolled into a Solo 401(k) Plan.
By having and maintaining a Solo 401(k) Plan, the people to whom you owe money—as a result of normal debt, bankruptcy or a civil court judgment—will likely not be able to reach your Solo 401(k) assets to satisfy the debt. However, Solo 401(k) Plan assets are not federally protected from divorce settlements or federal tax liens. With only the exception of Michigan and Rhode Island, most states will afford Solo 401(k) Plans full protection from creditors outside of the bankruptcy context.