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Real Estate Solo 401K

If you are self employed, you can set up a Solo 401K or Solo 401K Roth plan and invest in real estate.

A Little Background

Setting up your own 401K plan has always been expensive and difficult. There were better retirement savings vehicles to choose from like a SEP IRA. But, just when you thought your government did not love you anymore, along came the Solo 401K and Solo 401K Roth plans. These plan bring retirement planning, real estate investing and tax avoidance to a new level.

How Much Can I Contribute? As in hide, shelter or keep away from Uncle Sam.

First, you can contribute up to 100% of the first $15,000 of your 2006 compensation or self-employment income ($20,000 if you'll be 50 or older at year-end).

Next, you can contribute and deduct an additional amount of up to 25% of your compensation income, or 20% of your self-employment income. This second part of your annual contribution is like what you can do with a traditional small-business retirement plan.

Let me give you an example:

Your corporation pays you $80,000 this year. The maximum deductible contribution to your solo 401(k) account would be a whopping $35,000 [$15,000 + (25% of $80,000)]. That's a lot more than the $20,000 you could contribute to a traditional plan (25% of $80,000).

Now say you earn $80,000 from your sole proprietorship. The maximum solo 401(k) contribution would be an impressive $31,000 [$15,000 + (20% of $80,000)]. With a traditional plan, your maximum contribution would have been a mere $16,000 (20% of $80,000).

If you're 50 or older, your maximum solo 401(k) contributions for 2006 would be $40,000 [$20,000 + (25% x $80,000)] and $36,000 [$20,000 + (20% x $80,000)], respectively.

This is just an illustration, and if you make more than $80,000 from your solo business activity, you can contribute even larger amounts to your solo 401(k). But the absolute dollar cap for 2006 is $44,000, or $49,000 if you're 50 or older at year-end. So as you approach $220,000 of income, the solo 401(k) advantage over traditional plans shrinks, because of the dollar caps.

If you and a spouse are both over 50 and work together, you can stuff $98,000 a year into the plan.

Why You Will Love Solo 401K Plans

If you do not have the proverbial pot to pee in, then all of this really does not matter. You need to work with me on some pre-construction projects and start making some money. But if you are self-employed and have money to shelter, this features of this plan will blow your mind. Am I getting too carried away?

Since this site is about real estate in Florida (a catchy name for a site), let us focus a little on the real estate investment aspect of these plans.

Use Your 401K with the Bank's Money - You can invest the funds in real estate either by themselves, or, you can borrow money from a bank and leverage the 401K funds. With a self directed real estate IRA you would have a tax liability for the portion of the investment that was funded with borrowed money. With the Solo 401K the gain goes right back into the 401K.

We have banks that will loan up 70% of the purchase price of the real estate. The condition is that it is an income property and the income exceeds expenses by 10%. Our commercial office space condos meet that requirement and can give you a positive cash flow plus appreciation. When you sell them, the gain is not taxed but goes right back into the 401K.

Give Yourself a Loan - You may borrow up to 50% of your account balance (up to a $50,000 loan) and repay it over five years (or longer, if the loan is used to acquire a principal residence). Interest is paid back into your own 401k plan at around prime plus 1%. The interest paid is expressly nondeductible, regardless of the purpose of the loan. (You cannot borrow from a SEP-IRA or IRA, but you can roll a SEP-IRA or IRA into your Solo 401k and then borrow from it.)

Defer the Taxes and Eliminate the Need and Cost of a 1031 Exchange - When you sell your investment, the proceeds go back into the plan funds. You do not pay taxes on the gain. When you withdraw and use the money for retirement, you pay the taxes at that time. If you use the Roth option, you never pay taxes on the gain.

Roll Your IRA and Current 401K Into a Solo 401K - You can roll existing accounts into your Solo 401K. This gives you a leg up on accumulating the necessary funds to begin investing.

Contribute Only When You Want To - the contributions are discretionary. This means that you are not required to contribute funds to the plan.

Once you have accumulated enough money in an a Solo 401K, you can go in and out of real estate deals and never worry about the tax consequences. You can buy a house in the morning and sell it in the afternoon and defer the taxes on the gain. If you invest in real estate, your mind is now racing with the possibilities. If you are a novice, then you have no idea how big this is. It allows you to turn ho-hum deals into fantastic opportunities. You can thank me later.

Potential Downsides

First, if you have employees, the tax law may require you to contribute to their accounts as well as your own. But this is an issue with any type of tax-deferred retirement program — including a 401(k).

Second, setting up and operating a 401(k) plan involves some degree of paperwork and administrative nonsense. Fortunately, with a solo 401(k), this is only a minor concern, because you're the only participant. Typically you'll pay a small set-up fee (somewhere around $100) plus an annual fee of $50 to $250.

How To Start

You should call me and discuss your situation with me. We have plan administrators who do not charge a lot of money to set these plans up and manage them. I have personally used them for years and they are very professional.

Martin Unger
Real Estate Investments

- Pre-Construction
- Spec Homes
- Condos
- New Homes
- Land
- Relocation

954 - 255-5056 (office)
954 - 461-0319 (cell)
775-254-2881 (fax)

(an associate of London Realty Corp)