How a Solo 401K Plan Allows Real Estate to be a Part of Your Retirement Planning

When it comes to retirement planning, most 401k and IRA plans limit their participants investments to stocks, bonds, or mutual funds. While this strategy has worked in the past, recent economic events show that it is not without risk.

Many investors are now looking at real estate as a promising alternative. With certain real estate assets, the earnings are more steady and predictable, offering much less risk.

With a self-directed Solo 401k plan, investing in real estate can now be a part of retirement planning.

What is a Solo 401k Plan?

The Solo 401k is a retirement plan designed for small business owners and self-employed individuals. Even if you’re not self employed, many real estate investors can qualify if they work for themselves as an agent, a contractor, a flipper, and so on.

With the Solo 401k plan, investors can choose the self-directed option, which gives them checkbook control to their retirement savings. These plans also allow investments in real estate, including rental properties, mortgage notes, trust deeds, and more. As the plan trustee, investors can now choose to direct all the investments in their plan.

Why invest in real estate with a Solo 401k plan?

Real estate investments are often considered less risky compared to the stock market. Adding real estate assets to a retirement portfolio can boost earnings and diversify the risk.

Self directed retirement plans, including the Solo 401k, have the tax advantage that can help real estate investors grow their wealth faster. All income earned by a Solo 401k plan is tax-deferred. This means the plan owner can choose to re-invest the earnings without worrying about tax payments until years later as opposed to the year in which the investment income is earned which allows your retirement funds to grow tax-free!

The Solo 401k plan also allows plan owners a generous contribution limit of up to $59,000 annually as of 2015. This allowance, together with the tax-free rollover advantage, can help plan owners quickly accumulate enough funds for their investment ventures.

Another advantage of a Solo 401k plan is its ability to use non-recourse financing without paying additional tax. While non-recourse financing is possible with other retirement plans, such as the IRA, the use of financing is often taxed with the Unrelated Business Income Tax (UBIT). For a Solo 401k plan, this tax does not apply to the use of non-recourse financing. Therefore, plan owners of a self directed Solo 401k plan have the unique advantage of accessing tax-free leverage for their real estate purchases.

The Solo 401k can be invested in the following types of real estate:

  • Residential property
  • Commercial property
  • Foreclosures
  • Single family rental property
  • Apartments
  • Townhomes and condominiums
  • Mobile homes
  • Manufactured homes
  • Mortgage notes
  • Tax deeds
  • Tax liens
  • Raw land

The process of investing in real estate with the Solo 401k can be very similar to purchasing a property personally. After establishing the Solo 401k, the plan is ready to be invested into real estate.

Once a property is identified and due diligence is conducted, the property is purchased in the name of the Solo 401k plan. The title to the property and all transaction documents are in the name of the plan. As trustee of the plan, the participant signs all documents in the name of the Solo 401k. All expenses must be paid from the Solo 401k plan, and all income and gains from the investment must be returned to the Solo 401k account.

If the Solo 401k account does not have sufficient funds to purchase the property, there are two possible options. First, the Solo 401k can purchase an interest in the property in partnership with another non-disqualified person. For example, the Solo 401k can be used to purchase 50% of the property with a non-disqualified partner purchasing the remaining 50%. The investment from the Solo 401k account would go directly into the property. All property expenses would be divided between partners, in relation to the percentage of ownership. All income or gain from the property would also be divided between the partners in relation to the percentage of ownership in the property.

A second option to purchasing a property with the Solo 401k is obtaining a non-recourse loan. A non-recourse loan is the only form of debt financing that can be used in conjunction with the Solo 401k. A standard recourse loan is considered a prohibited transaction.

Loan Feature

The Solo 401k also contains a loan feature that allows the participant to borrow from the account at any time to finance a real estate purchase. The Solo 401k loan can be made for up to 50% of the account or $50,000, whichever is less. These loans can be used for any purpose, such as investment expenses- repairs, upgrades, and renovations.

These advantages make it possible for investors to invest their retirement savings in real estate. Many investors are using this strategy to take advantage of the tax benefits that the plan offers, while growing their portfolios with low-risk and high-return investments.

If you’re interested in exploring the option of investing in real estate, please feel free to contact me any time  – I would be happy to discuss any questions with you.

Jason Opland, REALTOR® | Better Homes and Gardens Commercial | 614 332 6984 | 

**Please note this in no way represents tax advice – please consult with your attorney and CPA regarding details about your specific situation.