TAX-FREE INVESTING USING A SOLO 401K PLAN
With a Solo 401K Plan, you will be able to invest in almost any type of investment opportunity that you discover, including: Real Estate (rentals, foreclosures, raw land, tax liens etc.), Private Businesses, Precious Metals, Hard Money & Peer to Peer Lending as well as stock and mutual funds; you're only limit is your imagination. The income and gains from these investments will flow back into your 401K Plan tax-free.
Because a Solo 401K Plan is tax-exempt pursuant to Internal Revenue Code Section 401, in general, all income and gains generated by plan investments will flow back to the Plan tax-free. The Solo 401K Plan is not required to file and state or federal income tax returns. The only time tax is due is when the Solo 401K Plan participant takes a distribution from the Plan.
The Power of Tax Deferral
A Solo 401K primarily is a tax-deferred retirement savings vehicle. Tax is generally deferred on Solo 401K Plan contributions and earnings until the year the Plan Participant owner takes a distribution. An individual under the age of 50 may make a $54,000 annual tax-deductible contribution to a Solo 401K Plan. Whereas, an individual over the age of 50 is permitted to make a $60,000 annual tax-deductible contributions to a Solo 401K Plan.
By using a Solo 401K Plan to make investments, the Solo 401K Plan Participant is able to defer taxes on any investment returns, thus, allowing the Plan Participant to benefit in several ways. The first benefit is tax-free growth: instead of paying tax on the Solo 401K returns of an investment, tax is paid only at a later date when a distribution is taken, leaving the investment to grow tax-free without interruption. The second benefit of tax deferral is that a Solo 401K Plan investment is usually made when the Plan Participant is in his or her highest income earning years and is thus subject to tax at a higher tax rate.
Using a Solo 401K Plan to make investments offers the Plan Participant the ability to defer tax on any investment gains, thus helping accelerate the value of the account. Whether Plan assets will be used to invest in real estate, precious metals, third-party loan, or foreign currency or options, all income and gains generated by the investment will flow-back to the Solo 401K Plan tax-free!
USE NONRECOURSE LEVERAGE TAX-FREE!
Unlike a Self Directed IRA LLC, when a Solo 401k Plan buys real estate that is leveraged with mortgage financing it is exempt from paying any Unrelated Business Taxable Income (UBTI) tax on the income or gain generated. "Debt-financed property" refers to borrowing money to purchase the real estate or other property (i.e., a leveraged asset that is held to produce income, such as real estate or stock).
Section 514 of the Internal Revenue Code requires debt-financed income to be included in unrelated business taxable income. Section 514(c)(9) allows a few types of exempt organizations to make debt-financed investments in real property without becoming taxable under 514. The provision applies to any "qualified organization," a term that includes (1) schools, colleges, universities, and their "affiliated support organizations," (2) qualified pension, profit sharing, and stock bonus trusts, such as a 401k Plan and (3) title holding companies exempt under 501(c)(25). 5 Generally, indebtedness incurred by a qualified organization in acquiring or improving real property is not acquisition indebtedness if the transaction navigates through a long list of prohibitions. The price paid by the organization for the property or improvement must be fixed when the property is acquired or the improvement is completed, neither the amount nor the due date of any payment under the indebtedness can be contingent on the revenue, income, or profits from the property, and the property may not be leased to the person who sold the property to the organization or to any person related to the seller within the meaning of 267(b) or 707(b). If the organization is a 401k Plan, the property may not be purchased from or leased to the employer of any of the employees covered by the trust or any one of several persons related to the employer. 5Financing for the property may not be received from the person who sold the property to the organization, a person related to the seller within the meaning of 267(b) or 707(b), or, if the organization is a qualified employee trust, an employer or related person who is disqualified from being seller or lessee under the rule described in the preceding sentence. The property must usually be owned directly by the qualified organization, except that an interest in a partnership or other pass-through entity qualifies if all of the partners or other owners are qualified organizations and each partner or other owner is allocated the same distributive share of every item of partnership income, deduction, and credit.
With the UBTI tax rates at approximately 35%, the Solo 401(k) Plan offers real estate investors looking to use nonrecourse leverage in a transaction with a tax efficient solution. Using a Solo 401k instead of a Self Directed IRA LLC to purchase real estate will allow an investor to use nonrecourse leverage (a nonrecourse loan from a bank) to make a real estate purchase greatly enhancing the investor's buying power as well as potential investment return.
To learn more about how the Solo 401k Plan structure nonrecourse-financing feature, please contact one of our 401(k) Experts at 800-IRA-0646 today!