5 Solo 401k Myths Explained

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Alternative investments that offer high rates of return are everywhere. But these might not be in your backyard and your current retirement plan probably limits where you can invest. Have you ever asked your retirement account person if you can invest funds in overseas real estate? If you did, they probably said it cannot be done. They were wrong. A Solo 401k can invest in overseas real estate and make many other promising alternative investments. That’s just one of the misunderstood myths about Solo 401ks that we bust here!

1. Setting Up and Managing A Solo 401k Is Complicated

Not True. It’s not at all difficult or complicated to set up and manage your Solo 401k. Purchasing alternative investments inside your Solo 401k is where the fun begins and where your profits can compound into even more substantial wealth building. But you do have to take the first step to set up your account. You can expect it to take about 30 minutes. Full-service recordkeeping, administration, and support are provided through Nabers Group. At Nabers, our goal is to make the process of setting up your Self-Directed Retirement Plan as easy as possible.

The Solo 401k plan is not a new type of plan. The primary law for controlling the Solo 401k and most voluntary retirement plans in private industry is the Employee Retirement Income Security Act of 1974 (ERISA). This is the same legislation that governs all the 401k plans offered by large corporations that most people are familiar with. The Solo 401k is simply the same opportunity for the self-employed. In fact, a Solo 401k offers more much freedom because corporations add layers of their own rules/policies that are not part of ERISA. The most notable is your Solo 401k freedom to have alternative investments instead of a short list of approved assets limited by corporate policy. Based on ERISA, the IRS defines a Solo 401k as having “the same rules and requirements as any other 401(k) plan.”

But not all plans are the same. Since 2006, Nabers Group has been the world’s leading authority on Self-Directed Investing — helping investors set up accounts, create wealth strategies, secure solid investments, and do what it takes to achieve their goals.

Step 1: Open your Solo 401k with Nabers Group. It comes with “Checkbook Access,” without the need to register any LLCs. It features the strengths of both 401k and IRA accounts. Every Solo 401k includes a Roth 401k subaccount for you and your spouse. Our team obtains the Solo 401k tax ID number from the IRS and completes your documents in 1 or 2 hours.

Step 2: Fund your Solo 401k. You can immediately begin funding your account with new tax-deductible contributions, rollover funds from existing retirement accounts, or both. We provide clear instructions for your current custodian, so your rollover is done swiftly and compliantly.

Step 3: Open a Depository Account for Your 401k Funds. This is how you establish checkbook control. You can use your favorite bank, brokerage firm, or we have preferred bankers ready to assist in opening your bank account effortlessly and compliantly.

Step 4: Start Investing. There are no transaction fees and no asset fees – ever. We do provide resources to invest in real estate, precious metals, loans, tax liens, and many other alternative investments. We also provide a steady stream of investing information with Mini-Courses, Webinars, Blogs, and other sources to help with your smart, legal, and lucrative investments.

Take a short quiz or talk with one of our experts to discover your investor profile and find the self-directed retirement plan that best fits you.

2. You Can’t Withdraw Funds Before Retirement Age

Not true. There are several ways you can withdraw funds from a Solo 401k before retirement. The most advantageous way is usually with a Solo 401k participant loan that Nabers Group automatically includes. You can take a personal line of credit of up to $50,000. This Solo 401k benefit is not available for IRA accounts. A Solo 401k loan can be up to either $50,000 or 50% of their account value. Unlike other methods of withdrawing funds before retirement, a participant loan can be made for any reason. There are no penalties or fees for these loans. However, there are a few simple rules that must be followed:

  1. Repaid over an amortization schedule of 5 years or less (up to 15 years if for your primary residence).
  2. Regular payments are not less frequent than quarterly.
  3. Pay back your Solo 401k at a reasonable rate of interest… generally interpreted as prime rate + 1%.

The tax-free Roth Solo 401k and Roth IRA have early withdrawal rules that are different from the tax-deferred Solo 401k. Because you have already paid taxes on Roth contributions, you can withdraw contributed funds at any time after the account has been established for five or more years. You can also begin withdrawing the tax-free earnings as soon as you reach age 59 1/2 and have the account for five or more years. An important distinction to understand here is contributed funds that have been taxed and earnings that are growing tax-free. Any early withdrawals you take are prorated between after-tax contributions and taxable gains. If you make an early withdrawal, a ratio is created between after-tax contributions and taxable gains. The after-tax contributions are not taxable a second time. But the taxable gains portion is included in your income, and you are subject to taxes and penalties on that amount.

Here are several articles on other ways to withdraw Solo 401k funds before you reach retirement age:

3. You Can’t Rollover Funds from Existing Retirement Plans To A Solo 401k Plan

Mostly not true. If you have an active retirement account with a current employer, your employer might not allow you to roll out of that account and into a Solo 401k. Too bad because that employer probably also doesn’t allow alternative investments either. Almost every other retirement account can easily be rolled into a Solo 401k. It depends on the type of plan or account from which you are intending to roll/transfer the funds.

If the funds are in a rollover or conduit IRA, Traditional IRA, SEP IRA, TSP, 457b, pension, a profit-sharing, or a former employer 401(k) plan, they can be rolled into the Solo 401K as long as you did not make any after-tax contributions to those IRAs.

Before we go into details about the rollover process, let’s distinguish a direct rollover from an indirect rollover. Both are allowed for all the same accounts with a significant difference being that you have full access to the funds using an indirect rollover (aka “60-day rollover”) but not with a direct rollover. If an indirect rollover is done wrong, the tax consequences can be severe. So, proceed with caution! With an indirect rollover, the previous plan administrator sends a check for your retirement funds to you and payable to you. This starts a strict 60-day clock ticking. If you fail to document the deposit of the entire balance into a new qualified retirement account within 60-days, the funds will likely be considered taxably distributed according to the IRS (and potentially have early withdrawal penalties if applicable). Don’t tempt yourself to “temporarily” borrow from your retirement during the 60 days. Use a direct rollover to avoid any potential tax catastrophe.

In the world of “transfers,” a direct rollover might also be called a trustee-to-trustee transfer. This is another way of saying the funds are moving directly from one retirement plan to another. Generally, direct rollovers and trustee-to-trustee transfers are fairly straightforward. These work for all types of qualified retirement accounts. Specific to an IRA, we will request the funds from your previous IRA custodian, get the money and deposit it into your new IRA or Solo 401k.

Our proprietary rollover process generates a rollover packet to send to your current custodian in two minutes or less. The funds will be directly deposited into your new Solo 401k trust, thus avoiding taxable distributions. The rollover check will be made payable to your new Solo 401k trust, and you’ll deposit the check in a bank or brokerage account also titled in the name of your 401k trust. This way, the funds go directly from one retirement account to another. That’s when you are ready to start making alternative investments. By combining multiple old retirement accounts into a single easy-to-manage Solo 401k you now have checkbook access to all those retirement funds to make alternative investments such as a small or medium apartment building.

If you have any questions about how to safely and quickly transfer funds into your Solo 401k, please book a call with one of our experts.

4. You Can’t Make Both Solo 401k and IRA Contributions In The Same Year

Not true. You can contribute to both a Solo 401k and an IRA, but the tax advantages you receive may be limited by your income. In fact, it’s common to contribute to both types of accounts in the same year. However, contributing to multiple retirement accounts changes the tax rules and benefits you receive in some cases.

The IRA tax deduction is only allowed if you meet the modified adjusted gross income (MAGI) requirements. Also, it is subject to phase out if you have an employer retirement plan and make above a certain amount. A Solo 401k counts as an employer retirement plan for the self-employed.

Individual circumstances have to be taken into account. If you or a spouse is contributing to an employer retirement plan (including a Solo 401k), your tax deduction for traditional IRA contributions may be reduced or eliminated, depending on your MAGI. Here are the 2022 limits:

  • Single taxpayers get a full deduction with a MAGI up to $68,000 and a partial deduction up to $78,000. You receive no deduction at or above $78,000.
  • Married taxpayers filing a joint return get a full deduction with a household MAGI up to $109,000 and a partial deduction up to $129,00. You receive no deduction at or above $129,000.
  • Married taxpayers filing separate returns get a partial deduction with a MAGI less than $10,000 and no deduction at or above $10,000.

If your income is below these thresholds for your tax filing status in 2022 and you want an additional tax deduction for the year, then contributing to both a Solo 401k and a traditional IRA is a great option. However, the numbers change in different scenarios such as both spouses contributing to a 401k, only one spouse contributing, or neither spouse contributing.

5. Setting Up and Managing A Solo 401k Is Expensive

Not at all. Nabers Group offers fast, easy, and compliant Solo 401k Setup for just $49/month. This is your path to the freedom of making alternative investments with checkbook control over your retirement funds. No setup fee is required.

  • IRS Approved 401(k) Documents
  • Ongoing Plan Maintenance & Support
  • Unlimited Free Rollovers
  • No Transaction Fees
  • Bank, Brokerage & Crypto Account Access
  • Checkbook Control
  • Line of Credit up to $50,000
  • IRS Opinion Letter
  • Form 5500-EZ Preparation
  • One-Click Annual IRS Maintenance

Set Up Your Solo 401k and Take Control of Your Future

Opening your Solo 401k involves very little work for a ton of benefits. Claim Your $61,000 Tax Deduction today! ($67,500 for those 50 or older.)

A Solo 401k retirement plan is easy to set up and allows for tax-deductible contributions much larger than an IRA or standard 401k… plus it puts you in control.

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