Before we get into the benefits of a Solo 401k, let’s look at what it is from the 30,000-foot level. A Solo 401k is a retirement savings plan started and contributed to by a self-employed person. It is a self-directed retirement plan that can maximize your savings. This plan goes by many names, including solo, individual, one participant, and single-k, but all refer to a 401(k) retirement savings plan for a self-employed person. You can contribute a large amount of money to this plan every year, add to your savings by earning on the investments, and then start taking distributions from the account after you turn 59½ years of age.
The Solo 401k is a special retirement plan for business owners (and their spouses). In many ways, the Solo 401k functions like a corporate 401k plan plus allows you greater freedom to invest in what you want and contribute to your schedule because you are your 401k plan administrator and trustee.
Our Solo 401k clients are entrepreneurs who understand the world is changing — because they are the ones changing it.
Now, let’s jump into a few of the biggest benefits of a Solo 401k…
Loan Money to Yourself
Unlike an IRA, you can borrow money from your Solo 401k and use the funds for anything that you want. Depending on your needs and perspective, this might not top your list of benefits of a Solo 401k. However, the Solo 401k plan is a perfect structure for a business owner seeking immediate funds for their business or to help pay personal expenses. Solo 401k account holders can borrow up to $50,000 or 50% of their account value – whichever is less.
Solo 401k loans are a unique benefit because these do not follow the traditional definition of a loan — there is no lender and no evaluation of your credit history. While your Solo 401k is not a completely liquid asset, it is still 100% your money. At its core, a Solo 401k loan is the ability to access some of your retirement savings on a tax-free basis with the ability to repay it directly to your retirement account — including paying the interest back to yourself.
Among the benefits of a Solo 401k is that participant loans have no credit checks, so you’ll get money in your pocket quickly. Additionally, the rules designated by your Solo 401k plan have unique features, benefits, and consequences that other loan plans do not. A Solo 401k loan is tax-free and penalty-free as long as a few basic rules are followed. The important IRS rules to be aware of include:
Each Solo 401k by Nabers Group automatically includes a participant loan!
Save Big on Tax Deductible Contributions
Among the big benefits of a Solo 401k are the multiple ways you can contribute to your retirement and the different tax-advantaged options you have. The nice thing about a Solo 401k is that you get to pick your tax advantage and can contribute to any option at any time, including multiple options in the same tax year. Among these are the pre-tax or traditional Solo 401k, the tax-free Roth Solo 401k, and the voluntary after-tax Solo 401k. Another benefit of a Solo 401k is that contribution levels generally increase yearly. Here are the 2023 contribution limits.
How traditional Solo 401k tax deductions work. Contributions reduce your income in the year they are made. In this case, distributions in retirement will be taxed as ordinary income. For many Solo 401k participants, this means paying taxes on a lower income in the year the contribution is made and again paying fewer taxes when withdrawals are made during retirement when you are in a lower tax bracket. Besides saving taxes on your personal income, there are added tax breaks for your business. If your business is not incorporated, you can generally deduct the employer contributions. If your business is incorporated, you can count the contributions as a business expense.
How Roth Solo 401k tax-free deductions work. An alternative is the Roth solo 401k, which offers no initial tax break but allows you to take tax-free retirement distributions. Specifically, it is the earnings on your investments that are 100% tax-free. There are several scenarios when this makes the best tax sense. Younger people in a lower tax bracket with the expectation of growing into a higher tax bracket before retirement can save more on taxes by paying the tax while in the lower bracket. Another is when an investment is expected to have an exceptionally high rate of return — pay the income tax now and withdraw all of the earnings tax-free during retirement. Another scenario is if you expect tax brackets to increase in the future — this can include federal, state, and local tax rates.
In general, a Roth is a better option if you expect your income to be higher in retirement. If you think your income will go down in retirement, opt for the tax break today with a traditional Sol 401k.
How voluntary after-tax Solo 401k tax deductions work. After-tax contributions are a special way to get extra cash into your self-directed retirement plan. After contributing up to the annual limit in your Solo 401k, you may be able to save even more on an after-tax basis. Earnings on after-tax contributions are considered pre-tax and would grow tax-deferred until withdrawals begin. Converting after-tax Solo 401k contributions to a Roth account is another option. After converting to a Roth, earnings can grow and be distributed tax-free if certain requirements are met. Solo 401k voluntary after-tax contributions do not start out as Roth funds. The Solo 401k by Nabers Group allows for both voluntary after-tax contributions and in-plan Roth conversions. These pieces are necessary to implement a strategy called the Mega Backdoor Roth Solo 401k. The mega backdoor Roth strategy allows you to compliantly get far more than the typically allowed limit of Roth funds into the plan via contributions.
Achieve True Diversification with Alternative Asset Investing
Diversifying investment portfolios via different asset classes has long been the holy grail of retirement investors since a milestone 1952 paper on long-term investing by Nobel Prize-winning economist Harry Markowitz, who was then just a student at the University of Chicago.
You could think of the Solo 401k as an every-which-way-you-can-invest retirement account. From crowdfunding to real estate, to farmland, to gold, to owning part of a diamond mind or hedge fund, it is completely up to you how to diversify your investments. Rather than the IRS code telling you what you can invest in, the IRS code has one simple stipulation about what you can NOT invest in — you cannot invest in collectibles. Collectibles might include:
- Wine and/or other Alcoholic Spirits
- Collectible coins (such as numismatic precious metals)
- Precious gemstones
- Non-fungible tokens (NFT)
Aside from that handful of collectible items, not many assets or asset classes are off-limits to a retirement plan.
This is one of the benefits of a Solo 401k that big corporation 401k accounts prohibit, although it is not prohibited by the IRS. Corporate 401k accounts typically limit you to only a couple of types of assets — mutual funds and a few institutionally traded funds (Wall Street). You should consider rolling over old corporate 401k accounts if a former employer’s account prohibits investing in things like real estate, tax liens, precious metals, private business, crowdfunding, cryptocurrencies, and almost anything else you want to invest in.
Self-Directed investing with your Solo 401k by Nabers Group is about the freedom to move your money about as you please. It removes all unnecessary limitations and resistance to making profitable investments.
No IRA Custodian is Required!
When it comes to the benefits of a Solo 401k, don’t underestimate the power of having full control over your account and assets. With the Solo 401k — No Special Custodian Is Needed!
Unlike an IRA, a Solo 401k plan does not need a special custodian who is paid to manage the plan. A Solo 401k plan is a trustee-directed plan with the owner serving as the trustee. This can have big implications for what your Solo 401k can achieve. One is that you are not paying a custodian or trustee to look over your shoulder and scrutinize every little thing you do — and paying them to do it. Instead, all of your money is going towards your investment goals, which you have full control over. These savings are significant compared to custodian plans with administration fees that often cost thousands of dollars.
Speed of transactions is another major benefit when you have full checkbook control and no custodian involved. Speed can be critical when a special investment opportunity comes along. Consider the recent real estate market. Sellers highly favor all cash offers compared to buyers that have to qualify for a loan for a specific house. The reason is that the seller can be sure the all-cash buyer has the funds and doesn’t need third-party approval to complete the purchase. When you have a custodian overseeing your investment account, that person is a third party who needs to approve your investments. When you have checkbook control, you can write the investment check right then and there — No Custodian Required.
A self-directed Solo 401k account gives the owner direct and immediate check-writing control of the funds.
Control Your Financial Destiny (Invest Your Way, Contribute as Much as You Want)
This is just a short list of benefits of a Solo 401k. Almost anyone can open a solo 401k. Even people who are employed by others and participate in a workplace-sponsored retirement plan are eligible for a Solo 401k if they also have a business in which they’re self-employed. There are no revenue or income thresholds to qualify – so long as you’re engaged in a trade or business to generate the income, you’re eligible. This is for freelancers, independent contractors, and small business owners. Your business can be a sole proprietorship or a formally structured LLC, C Corp, or S Corp. You’re eligible for a Solo 401k if there are no outside full-time common-law employees in any business owned by you and/or your spouse.
The many benefits of a Self Directed Solo 401k are very important. They start by allowing you full freedom in building a retirement portfolio. Solo 401k plans have high contribution limits, which allow you to make more investments in the future. Because they’re Self-Directed, you’ll have tremendous flexibility in terms of investments. All of this comes with multiple tax-advantaged options that you can select from or mix & match at any time to meet your tax-saving needs today and your retirement needs tomorrow. The flexibility is diverse to the extent that Solo 401ks are one of the few retirement accounts allowing participant loans that can be used for any purpose and then repaid to yourself.
Once formed, you can roll over funds from other retirement accounts to increase the amount of investable cash in your Solo 401k and leverage its incredible power. It gives you the power to invest in private opportunities – real estate syndications, cryptocurrency, gold & silver, private lending, and much more.
IT’S YOUR MONEY. INVEST IN WHAT YOU WANT.
The Nabers Group Solo 401k Unlimited® platform brings simplicity to self-directed investing. Ongoing fluctuations in the stock and bond markets and a breakdown of investor confidence in corporate America are driving the demand for alternative investments with a greater choice for retirement accounts. Investors now realize they can invest in real estate and other non-traditional assets using their retirement accounts.
Setting up a Solo 401k retirement plan is easy and allows for tax-deductible contributions much larger than an IRA or employer 401k. Importantly, it puts you in control with access to a world of alternative investment options. Book a Free Call with a Specialists at Nabers Group to Begin Participating in Alternative Investments with a Solo 401k or Self-Directed IRA