Solo 401k
| | Monday, March 09, 2009 @ 09:27 PM EDT
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Contributed by: Brian Blace
Brian Blace Properties
Read more archived articles about Tax Strategies
Contributed by Brian Blace
CompleteIRA
A lot of real estate investors have heard about using self-directed IRAs as a way to fund purchases, but not many know about Solo 401(k)s.
Solo 401(k)s have a few huge advantages over IRAs that make them worth looking at and they are much easier to have set up than you might imagine.
Solo 401(k)s were formed by Congress and came to life in late 2006. Sole proprietors, the self-employed, and anyone who has income from a business can have a Solo 401(k), (that includes real estate investors).
Solo 401(k)’s have several features that are superior to IRAs.
§ Much less onerous prohibited transaction penalties than IRAs.
§ Loan provisions are possible.
§ No UDIF tax.
§ Higher contribution limits $51,000 per person vs. $6,000 for an IRA.
§ Roth contributions up to $20,000 with no income limits, unlike Roth IRAs.
The UDIF tax is for real estate. If you purchase a property with an IRA and finance part of it you will still owe taxes on the capital gains of the percentage of the property that was financed. For example, the purchase price is $200k and you finance $100k.
You will pay taxes on 50% of the capital gains. If that same property is purchased and financed the same, but with a 401(k), there is NO tax due. How’s that for nice. There are other smaller differences but those depend more on the expertise of the 401(k) provider.
Also, husband and wife can combine efforts here in a solo 401(k) and roll existing IRAs and old 401(k) funds into a newly formed Solo 401(k). The only thing you can’t roll in is a Roth IRA.
Given how Wall Street has treated your IRAs and 401(k)s it really is time to explore your options.
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