4 Potential Big Benefits of a Self-Directed Solo 401(k)

In this example, the investor contributed $47,000 more to the Solo 401k, compared to the SEP IRA.

2. Potential tax credits

As part of the SECURE Act 2.0, self-employed individuals establishing a Solo 401k Plan can take advantage of the “Eligible Automatic Contribution Arrangement” tax credit. This credit is worth $500 per year, for 3 consecutive years, totaling $1,500, and both new and existing plans can receive this credit as long as they sign up for an eligible auto-enrollment plan.

The tax savings don’t stop there. Any annual fees to maintain your Solo 401k plan are also generally tax deductible to your business. This puts more money in your pocket while still maximizing what you can save for retirement.

3. Wider variety of assets for investing

Not all Solo 401(k) plans are self-directed. However, some, like the Equity Solo 401(k) allow you to invest in not just traditional assets like stocks, bonds, and mutual funds, but also alternative assets like cryptocurrency, precious metals, and real estate.

Many investors choose self-directed retirement accounts because they want the control of being able to invest in assets that they already have expertise in rather than ones that rise and fall with the market.

However, it’s also important to note that there are some key requirements to ensure you maintain compliance, including:

• Record Keeping System – you need to carefully record all transactions, including contribution sources, investment transactions, earnings on investments, and valuation updates.
• Plan Document Maintenance – adopting IRS approved plan documents to establish the plan and adhering to plan reinstatements when necessary.
• Annual tax reporting, including 5500 filing when necessary and 1099-R reporting for any distributions and conversions from pre-tax to Roth.

4. Unrelated Business Income Tax (UBIT) exemptions

Another advantage of using a self-directed Solo 401(k) is the UBIT exemptions.

Usually when an investor funds a real estate purchase within their IRA using a non-recourse loan Unrelated Business Income Tax (UBIT) or Unrelated Debt Financed Income Tax (UFDI) is owed on the debt-owned portion of the property. However, UBIT and UDFI don’t apply within Solo 401(k)s, meaning you can save possibly hundreds or even thousands of dollars.

For example, if an investor owned a rental property in their IRA valued at $400,000 with a $200,000 non-recourse loan, and they later sold it for $400,000, then 50% of the gains would be subject to UBIT or UDFI because 50% of the property’s value was leverage.

However, if that same investor held the property within their self-directed Solo 401(k) and later sold it, then they would not be subject to UBIT or UDFI and can keep more of the profit for themselves.

Set Up Your Self-Directed Solo 401(k)

As a solopreneur, the Equity Solo 401(k) allows you to potentially save more for retirement, achieve much needed tax-deductions, and create a tax-deferred or tax-free investing account. You also gain the ability to self-direct investments into both public market products and private market products, creating a truly custom retirement portfolio.

Remember to consult your legal or financial professional before making any decisions to get the most out of your retirement plan and schedule a call with an IRA specialist to learn more about the Equity Solo 401(k).

Equity Trust Company is a directed custodian and does not provide tax, legal, or investment advice. Any information communicated by Equity Trust Company is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.

Equity Specialty Services, LLC (“ESS”) has partnered with SEPira(k), a third-party technology provider, to offer you the Equity Solo 401(k) solution to establish and manage your Solo 401(k).  By combining SEPira(k)’s technology platform with ESS’s customer support, you will have the tools to manage your Solo 401(k) seamlessly.

Equity Specialty Services, LLC is a services company which offers services such as document preparation services, IRA Power Loans services and other services to assist an investor with its investments.  Equity Specialty Services is not authorized to advise you as to which documents you should use or may need or which services are recommended.  Equity Specialty Services does not offer investment, tax, or legal advice, and no services offered by us should be considered to replace the need for qualified investment, tax, and legal professionals. Please consult your legal or financial advisor before making any financial decisions. Under the guidelines for legal document preparation services, you must make all legal decisions yourself — including decisions about the type of documents you need.  Equity Specialty Services may receive or give referral fees for services it offers to investors.