Real estate is undoubtedly one of the most stable investments classes, and like many investment classes, real estate investments take time to mature. Combined, these two factors make real estate an excellent retirement investment, with many real estate investors able to retire almost entirely using real estate profits and income.
Even though real estate is a perfect investment for retirement, traditional 401(k) retirement plans don’t allow for the purchase of investment property. Thankfully, though, you can invest in real estate using a Self-Directed Solo 401(k), also called a Self-Directed Individual 401(k).
What is a Self-Directed Solo 401(k)?
With a traditional 401(k), your retirement savings are controlled by a broker who invests the funds in a limited number of asset classes like stocks, bonds, and mutual funds.
Self-Directed Solo 401(k)s, on the other hand, allow investors to choose the investments held in the 401(k), which can include precious metals, real estate, stocks, bonds, etc. (Note: See the details of a Self-Directed 401(k) for rules regarding prohibited transactions and disqualified people regarding investments.)
A Self-Directed Solo 401(k), therefore, allows investors to use a retirement saving vehicle that can include real estate, similar to a Self-Directed IRA.
Self-Directed Solo 401(k)s allow you to invest virtually tax-free, like a traditional 401(k) plan. Your money will still be working toward retirement in a Self-Directed Solo 401(k), but you personally direct which investments are made, and you have the option to invest in real estate.
Eligibility for Opening a Self-Directed Solo 401(k)
You can open and make contributions to a Self-Directed Solo 401(k) if both of the following requirements are met:
- You are a sole proprietor, or you own a business with no employees other than a spouse or partners.
- Taxable compensation has been received during the year.
Note: These requirements do not prevent you from being employed full-time with another job. Consult a 401(k) retirement provider for specifics relating to your employment circumstances.
Why Choose a Self-Directed Solo 401(k)?
There are a number of situations where a Self-Directed Solo 401(k) can be beneficial when compared to a traditional 401(k). So, here are the top four reasons to choose a Self-Directed Solo 401(k).
Choice is perhaps the most significant factor that separates Self-Directed Solo 401(k)s from traditional 401(k)s, and it’s the biggest reason to choose a Self-Directed plan. With a Self-Directed Solo 401(k), you choose where to invest your retirement savings with few restrictions.
#2 Account Loans
With a Self-Directed Solo 401(k), you can borrow up to $50,000, or half the amount of your account balance, whichever is lower.
#3 Higher Contribution Limits
Self-Directed Solo 401(k) plans allow tax-free contributions, just like traditional 401(k)s, but contributions are capped at a much higher level. You can contribute up to $59,000 to a Self-Directed Solo 401(k), as well as your self-employed spouse, which amounts to about ten times the amount you can contribute to traditional plans.
#4 Roth Sub-Account
In addition to the $59,000 you can contribute to your Self-Directed Solo 401(k) every year, you can also put an additional $24,000 in a separate tax-free Roth sub-account with a Self-Directed Solo 401(k) plan.
Graystone Investment Group
Graystone Investment Group is an experienced Investment Group wholesaling properties in the Greater Tampa Bay market.
Unlike other wholesaling groups, we find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years, at no extra charge.