• Daniel Blue

Real Estate Investors Should Harness the Power of a Solo 401(k)


Daniel Blue of Quest Education in Seattle, WA.

Over the last few weeks, I had the opportunity to speak at a few real estate investing events about the power of self-directed retirement accounts. I talked about how self-directed retirement accounts can help people accomplish their real estate and financial goals. Surprisingly, a lot of folks that I' spoke to either: knew about a self-directed IRA or they use already use a self-directed IRA to do their flips or do promissory notes. However, They did not know about a Solo 401(k). It's really important that you know about a Solo 401(k). So if you're a real estate investor, you need to listen up to this video, because a Solo 401(k) is going to change things for you in a way that you never thought was possible. The first advantage of a Solo 401(k) is that it is exempt from UBIT.


What does that mean? Well, if you've got a self-directed IRA and you're using it to flip houses or do active investments, more than likely, you're going to have to pay the IRS, UBIT. UBIT stands for Unrelated Business Income Tax. That's a separate tax that you're going to have to pay Uncle Sam. If you did those same flips and same active investments in a Solo 401(k), it will be exempt from UBIT.


The second advantage of a Solo 401(k) is the contribution limits. Allow me to break the importance of contribution limits. Let's say you've got your IRA set up, your money is in it, and you want to add more to it. You could only add $6,000 to $7,000 per year to that IRA. If you had a Solo 401(k) and you wanted to add more to it, you could put anywhere from $56,000 to $62,000 a year into the account.


Are you someone who loves the Roth side of things? This is when you put money in your retirement and it grows tax-free. This is post-tax money. Imagine putting $50,000 in your Roth Solo 401(k), and it grew to $100,000. All that money you made tax-free. You can't put that kind of money in an IRA.

Another big difference between a Solo 401(k) and a Self-Directed IRA is the loan feature. The Solo 401(k) has a loan feature, while the Self-Directed IRA does not. In a Solo 401(k), you can take money out of the account without paying penalties in taxes, and then use that money however you want. If you want to use it to start another business on the side or pay off some debt, you could use the loan feature to do this. Again, in a Solo 401(k) you can borrow money out of your retirement savings penalty tax-free and use the money however you want. There's no loan feature in an IRA, so you can't do those things that I just described.


So to wrap up, in an IRA, there's no loan feature, you're going to have to pay UBIT, and you're gonna have much lower contribution limits. So if you're a real estate investor, and you have a self-directed IRA or maybe you're thinking about getting a self-directed IRA, look into the solo 401(k) a little bit more, and see if it fits what you're looking for.


If you have questions, reach out to me. I'm here to help.

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