We all know the rich are getting richer. The question you are probably asking yourself is how are they getting richer? And how can you become part of that elite group? An important part of the answer to the first question is that they invest their money to earn more money using the principle of compounding interest. Another important part of the answer is that these people invest a significant amount of their money in alternative investments.
Alternative investments are a broad category that includes anything outside of traditional investments (stocks, bonds, and cash). Note: Currencies are usually considered a cash traditional investment, but cryptocurrencies are considered an alternative investment.
The top five investments that you should consider in your retirement portfolio are:
- Real Estate
- Tax Liens
- Private investments (private equity, startups)
Real Estate as a Solo 401k Alternative Investment
You CANNOT invest in real estate with a traditional employer-sponsored 401k. However, you can invest your Solo 401k in real estate by setting up a self-directed individual retirement account. This includes investing Roth Solo 401k funds in real estate. Nabers Group ensures the plan has IRS-approved documentation allowing these options.
Invest in what you know!
With a Solo 401k, you can invest in almost any type of real estate, including single-family homes, rental vacation homes, multifamily, apartment buildings, commercial property, mobile homes, raw land, natural resources, and more!
Real estate is a highly popular alternative investment among Solo 401k account holders. The IRS has always allowed real estate investments as long as they do not involve a prohibited transaction or disqualified person. A major attraction is the steady stream of passive income. It is also one of the most trusted ways of diversifying your portfolio. An additional benefit is that real estate can be a strong hedge against inflation. The list of Solo 401k real estate investing advantages goes on to include financing mortgages with non-recourse loans and avoiding Unrelated Debt Financed Income (UDFI).
Real estate is something that almost all of us have been involved with, even if it is just owning our own homes and renting before we buy. We are comfortable and understand how real estate transactions work. Real estate is an alternative investment that middle and even lower-income investors can get into with the same confidence that the rich invest.
Understanding the Solo 401k Structure
The other top four alternative investments are discussed below, but an understanding of how a Solo 401k makes these investments is helpful. You first need an IRS pre-approved plan document which Nabers Group provides. This establishes your retirement trust, and you will have full “checkbook” control of your account. You will open a bank account in the name of your Solo 401k from which you make investments by wiring funds and writing checks that you sign as the trustee of your retirement account. You can also have debit cards issued from your retirement account to make related transactions such as paying for repairs to rental property.
Although you don’t have to, you can have a specially formed LLC that is specifically designed to be owned by your Solo 401k. You may want to do this as an extra layer of liability protection, or it can be a way of structuring real estate deals that involve partners. You can also set up an LLC as the owner of each individual property as another type of liability protection.
The tax benefits that come with your Solo 401k cannot be beaten by any other retirement account. With a traditional Solo 401k, your contributions are tax-deductible from your personal income in the year they are made. In 2022, you can contribute $61,000. There is also a catch-up contribution of an extra $6,500 for those 50 or older. All the earnings from your Solo 401k are then added to your retirement account without being taxed. This becomes the power of compound interest because you will be earning interest on money that otherwise would have been going to the IRS as taxes. With the traditional Solo 401k account, you don’t pay taxes until you begin making withdrawals during retirement and will likely be in a lower tax bracket.
With a Roth Solo 401k, you can make the same high level of contributions. You can make all the contributions to a Solo Roth 401k or split them with a traditional Solo 401k. The difference with a Roth account is that you pay income tax before making the contribution. The tax advantage is that earnings are totally tax-free. You never pay taxes on the earnings, not even when withdrawn during retirement. Nabers Group provides a Roth Solo 401k sub-account with your traditional Solo 401k.
A Solo 401k has many more tax advantages than investing with personal funds!
Cryptocurrency as a Solo 401k Alternative Investment
Crypto is one of the biggest buzzwords of our times. You’re probably also familiar with the old adage “don’t put all your eggs in one basket,” which is exactly what alternative investments are all about. As a new category of investment, crypto can be volatile, but it is estimated that all cryptocurrencies combined already accounted for about 7% of the world’s money. That should catch your interest and make it worth your time to learn more.
Crypto does operate in a separate sphere from traditional investments such as currency exchanges. As a result, it is mostly isolated from market swings. It is decentralized from governments, banks, and other financial institutions which limits/eliminate outside influences.
Cryptocurrency is still very new, but that allows investors to get in on the ground floor of an entirely new category of alternative investments that are growing phenomenally fast. Already, many merchants accept bitcoin and other cryptocurrencies-both online and in physical stores. As cryptocurrency grows increasingly mainstream, it will become easier and easier to use in the real world. This gives it a huge advantage over other investments that can be difficult to liquidate into spendable cash in a short amount of time.
Still, crypto is new and comes with some degree of risk. You will want to understand how it fits with your risk tolerance and investing objectives. What we do know for sure is that early investors in Bitcoin made a huge amount of money. With new cryptocurrencies emerging every day and rapid innovation still underway, today’s investors interested in alternative investment strategies also have the potential to turn a significant profit.
However, new investors must practice due diligence to select specific cryptocurrencies with the most promise (and survivability) as the market matures. Crypto is a growth investment with a higher than average risk. First, you want to ensure that your savings, emergency reserve, and basic retirement funds are relatively secure. Also, consider your investing time horizon. Generally, younger investors can afford to be more aggressive with their investments.
Nabers Group has been investing in bitcoin since April 2013. We’re the most experienced with how to compliantly structure your retirement account, so you can not only purchase crypto but hold your own keys. That means you’re in charge of what types of coins you want to buy, and how much, and you don’t have to compromise safety by handing over your private keys to a stranger.
With crowdfunding, you can own a piece of a skyscraper, hospital, or shopping mall – all within your Solo 401k. Crowdfunding is about a large number of individuals investing a relatively small amount of money in a large project. A combination of technology and the loosening of some laws by the Securities and Exchange Commission (SEC) has enabled smaller investors to invest in much bigger investments that were previously open only to the already wealthy. Crowdfunding is a way to raise funds from a large and diverse group of people with different backgrounds and from different geographical locations. When tens or hundreds or even thousands of people pool their money, there is almost no limit to what they can invest in.
Through a Solo 401k, crowdfunded investments provide the capability to diversify your retirement portfolio in more ways than have ever been available before. The types and scope of investments are almost limitless but here are a few of the most common.
Peer-to-peer lending. This is one of the original uses of crowdfunding. Your Solo 401k can
invest in loans or debt issued to individuals without a bank or other financial institutions acting as an intermediary. These loans typically pay a much higher rate of interest than you will find almost anywhere else. But high-interest rates are a strong indicator of risk, so be sure to do your due diligence.
Real estate. Your Solo 401k can already invest in real estate, but crowdfunding is how you take it up a notch to make much bigger investments such as skyscrapers, hospitals, or big commercial real estate projects. Real estate crowdfunding deals can be in the form of ownership or debt.
When crowdfund investing, you do want to understand how the investment is structured. In some cases, it could trigger unrelated business taxable income also known as UBTI. Structured correctly, this is not an issue. However, the wrong structure can mean the difference between making a smart investment and incurring an unnecessary tax burden.
Crowdfunding can get you into exciting and highly profitable investments. Diversifying your Solo 401k should be paramount, and crowdfunding gives you the ability to invest in many different types of investments. However, be sure to do your homework and weigh the pros and cons.
You should always consult a financial advisor before making any investment.
Tax Liens as a Solo 401k Alternative Investment
A tax lien is a government claim on someone’s property (most likely the city or county). Liens are usually placed when a taxpayer, such as a business or individual fails to pay taxes owed. The purchase of tax lien certificates is a surprisingly safe investment. These pay a rate of interest that can easily be 15% or higher. If the property owner fails to pay the back taxes plus the interest owed, this can be a very inexpensive way of purchasing properties for a fraction of their value!
You do need to learn the tax lien laws in each particular region that you are considering investing in. Tax lien sales usually take place at public auctions. How often depends on the area in which it is located. Urban areas may hold monthly auctions, while smaller rural ones might only have one auction a year. Also, how long local authorities wait to seize individual properties and how much they allow to be owed on it before one of these events is up to the tax lien laws in their particular area.
Properties are often shockingly acquired for a few thousand dollars, regardless of how much they’re actually worth! On the other hand, paying off the lien on the wrong property may cost more than the house or land is worth.
Private Placements as a Solo 401k Alternative Investment
Private placements. This is about lending money to businesses. It can also be about owning a part of a business. These can be well-established small or medium-sized businesses, or they can be startups. It can also be venture capital investing in businesses that have innovative ideas but don’t yet have a product or service to sell. These are not businesses that are listed on stock exchanges, but they might be one day, and your investment could be what powers them to an initial public offering (IPO) that pays you very well.
It’s common for these investments to be in the form of stocks in private companies. The SEC now allows companies to raise money through crowdfunding up to $5 million without having to register with the SEC.
The Nabers Group Solo 401k Unlimited® platform brings simplicity to self-directed investing in these top five alternative investments and many others. It comes with unlimited sub-accounts, including a brokerage account to help you move money between alternative and traditional investments easier, faster, and smoother. Self-Directed investing with your Solo 401k is all about the freedom to move your money about as you please. It removes all unnecessary limitations and resistance to making profitable investments.
Set Up Your Self-Directed Retirement Plan and Start Investing In Alternatives
Ongoing fluctuations in the stock and bond markets along with a breakdown of investor confidence in corporate America are driving the demand for alternative investments with 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.