Why is the Solo 401(k) Better
Four reasons why the new Survival Solo 401(k) is better than the Check Book IRA LLC. Even though both have check book control of your retirement the ability to borrow from your Solo 401(k), to contribute more each year, become your own custodian and finally to use leverage with the penalty of UDFI tax makes the Solo 401(k) a better choice for those that qualify.
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4 Reasons the Solo 401(k) is Better
I just want to cover, briefly, a couple of the reasons why the Solo 401(k), is better than the Check Book IRA. If you’re able to qualify by being an employee/employer with no other employees other than owners, except your spouses which are allowed, there are several things that are really cool about the Solo 401(k).
Number one, you can put a lot more money in and shelter it from taxes. In the IRA, you can put like $6,000 a year, so you and your wife could put in like 12. But with the Solo 401(k), you could put up, you and your wife, depending on your age and how much money you make. You can put in up to $118,000 a year sheltered. And as soon as it goes in, it goes into the plan; and you’re the administrator so you can instantly invest it in something. So that’s a way.
Number two, you have no custodian. There’s no custodian involved, whatsoever. You are the plan administrator. You open an account and that’s where the account is. There’s no custodian. You don’t have to ask anybody. You have a plan that we draft up that’s approved by the IRS that gives you the authority to do all these things as a plan administrator. How much money can be put in, what investments can be done; and you have no custodian over it. None.
So that plan is local and you can set up in your local bank account. Reporting is negligible until you get to have $250,000, you don’t even send a report to the IRS. There’s no tax return because there’s no LLC. You don’t have that. You’re writing checks out of the plan, so you don’t need an LLC. You can add one if you want to, but you don’t need one.
The next thing is, this is really cool if you’re buying real estate, if you leverage real estate with an IRA, whatever percentage is leveraged, like let’s say you leveraged 60% of something so that would mean you’d put down, let’s say it was $100,000, you put down 40 grand out of your IRA and you borrow $60,000, then 60% of the profits were earned by non-IRA money. Therefore, 60% of the profits are taxable. And it’s a pain, and it can be a pretty healthy tax, that it’s kind of, you know, it’s a headache. Now, with Solo 401(k) there is no UBIT tax like that. None. So you put down $1,000 on $100,000 property, and you double your money. You make $200,000 now and you’ve got it in your account. It’s all treated like it’s IRA money. There’s no UBIT tax at all. None. Zero. You don’t even have to report it. So that’s really outstanding.
And then finally, with an IRA, if you needed some money to do a deal, personally, or maybe you need a little money for a little bit, you can’t touch it with an IRA. Now, you can pull it out for sixty days, once every twelve months. Not once a year, once every twelve months. So if you pulled it out in February, you can’t pull it out next January, you have to wait until February rolls around. You’ve got sixty days to get the money back in. With a Solo 401(k), you can borrow up to half of the amount that’s in your Solo 401(k) plan, up to a maximum of $50,000. That can be personal, it’s just borrowed out. You pay hardly any interest and you structure the loan. You’re the guy that does it. You’re the plan administrator. You approve that loan and it’s totally legal. So you can take that money, maybe put a kid through school and then pay it back later, whatever. So that’s another advantage.
So there is certainly some advantage with the Solo 401(k). Cost is about the same as a Check Book IRA to set it up and on an annual basis. So if you can qualify for that, that’s the reason that the solo k is really gaining popularity.