Quote: “The Tax Code is a comprehensive guidebook of all government incentives.” ~Alan Neely
We want to clarify; this is for knowledge sharing only and is not tax advice. Please consult your tax advisor, financial planner, and lawyer for advice regarding your specific situation. If you do not already have a team of professionals, we are happy to refer you to accountants and estate planning attorneys that can help you.
We have been learning about the tax code since 2005, when we first met our accountant, Thomas Howell. A very creative man who tempers common sense and a solid moral compass with the tax code. We feel Thomas provides us with the maximum tax benefits the tax code allows.
We are going to start by talking about the tax code. Most people consider it a rule book full of penalties and punishments. Instead, you should switch your thinking around and view it as a comprehensive guidebook to all the government incentives.
In the case of apartments, the government wants responsible citizens of this great country to provide clean, safe, and affordable housing. Therefore, Congress passed several laws in the tax code to encourage investors to provide housing:
- Depreciation rules.
- Bonus depreciation rules.
- The tax code also allows your investments to grow tax deferred via a Solo 401k or IRA.
- If you hold the property for more than five years, your tax rate significantly reduces from ordinary income rates, which top out at 37.5%, to capital gains rates, which currently top out at 15%.
The uneducated call these incentives “tax loopholes for the rich.” When they are rules, codes, and laws purposefully placed in the tax code for you, me, your neighbor, and every American advantage, tax professionals tell us that most countries have similar tax laws. However, at least 95% of America would rather waste their free time than spend time learning about methods the wealthy use.
Solo 401k Plan Overview
We have invested in seven apartment syndications using our Solo 401k dollars, our funds to grow TAX-FREE until it is withdrawn from the Solo 401k, just like any other 401k account. If you’re considering investing in apartments with your Solo 401k, you could take advantage of some great tax benefits. Here are just a few of the ways Solo 401k investors can save on taxes:
- Your Solo 401k contributions are generally tax deductible. That means you can reduce your taxable income and possibly save on taxes at the end of the year.
- You can also take advantage of tax-deferred growth with Solo 401k investments. That means you won’t have to pay taxes on any gains until you start withdrawing money from your account, potentially resulting in significant tax savings over time.
- You can also rollover other retirement accounts into Solo 401ks, allowing for greater diversification and tax efficiency.
- Finally, Solo 401k investors may be eligible for Solo 401k loans that can help pay for their investments in apartments, providing additional tax benefits. The loan must be a non-recourse loan.
All the above tax savings compound. While most people receive a paycheck AFTER all taxes have been taken out, as a small business owner, you pay yourself first and all your company expenses, then the company pays tax on the profit that is left. The funding of a Solo 401k would be a business expense, reducing the company’s profit.
Then as an added benefit, you will not pay capital gains or ordinary income tax on the 401k investments. Again, think about this, you do not pay taxes on the growth of your investment!* *(Until you withdraw the funds.)
That is a considerable saving. We choose to invest those dollars into another apartment deal. It is ALL about infinite returns to grow your money. Elena and I like to picture a snowball pushed over the hill, and it becomes an ever-growing force, gathering more and more momentum as it goes, ultimately creating legacy wealth for our heirs.
How to set up a Solo 401k
To have a Solo 401k, you must own a business. Don’t have a business? Start one.
Then you will need a plan administrator. The administrator we use to set up our Solo 401k is, MySolo401k.com. Setting up a Solo 401k is a straightforward process with just a few pieces of paper. My Solo 401k will create a customized and IRS-approved solo 401k plan.
The solo 401k plan will be a trust type of account in the name of the company with you as the beneficiary. It will have a name like My Company LLC Trust for the benefit of John Smith.
Next, you will need a financial institution to hold the funds, which is also simple. Finally, you will open up a trust account at a financial institution in the name of your Solo 401k plan, My Company LLC Trust, for the benefit of John Smith. We like Fidelity because they make the process very simple.
You will have complete control over your solo 401k funds. Which means you can wire funds at any time. Or you can even use a checkbook.
We have used Fidelity Investments to hold our Solo 401k funds for 13 years. Many companies with thousands of employees use Fidelity to manage their 401k plans. Nothing is stopping you from doing the same thing.
How to Fund Your Company’s Solo 401k
One easy method is to roll over existing retirement accounts into your new Solo 401k. You can even roll over IRA funds. WARNING – set up your Solo 401k first! And have the custodian of your retirement account wire the funds directly into the Solo 401k. It must NEVER go through your personal bank account, or you must pay taxes on it.
We have funded our 401k since 2010 using employer contributions. The employer is our own company.
The 401k tax laws allow for up to $22,500 of your income to go into the plan, this is called an Employee Deferral, and you would pay no income tax on that amount. Furthermore, your Employer (the company you own) can contribute $43,500 to the Solo 401k plan. For a total of $66,000 Per Year. Or $73,500 for those over 50 using “Catch-up Contributions.”
The contributions amount your company pays into your 401k is an ordinary business expense. Meaning it lowers the Net Income. So congratulations, now your company is not paying taxes on $66,000 or on $73,500 if you are using Catch-up Contributions.
How to invest with a Solo 401k
The trust will have an EIN, Employer Identification Number. It will be the same EIN as your company. Here is a link to a W-9 you can use as an example. This link comes from MySolo 401k.com
Caveats of investing with a Solo 401k
Major caveat: When you take your money out of the 401k, it will be taxed as ordinary income, just as any 401k.
Other fine print and caveats to be aware of:
- Solo 401ks are specifically designed for self-employed individuals, freelancers, and small business owners without employees (other than themselves or their spouse).
- It is a 401k account with the same withdrawal rules and penalties as any other 401k.
- You cannot use Solo 401k funds to purchase a property you will have use of or have material participation in. In other words, passively investing in apartment syndications is a perfect way to grow your wealth tax free using a Solo 401k.
- Do not comingle Solo 401k funds with your own funds.
- Do not get a credit card in the name of the Solo 401k.
- Do not pay personal expenses using your Solo 401k.
- Do not pay yourself a salary from your Solo 401k.
By setting up a Solo 401k, you can enjoy the same tax benefits as traditional 401(k) plans and have more control over your retirement savings. Solo 401ks offer flexibility and customization options that other retirement plans don’t provide. So if you’re a small business owner, the Solo 401k plan may be the perfect solution for your retirement savings.
As stated earlier, we have been using a Solo 401k for 13 years. The tax benefits and freedom of controlling our 401k account have been very rewarding for us!
CONSULT YOUR ACCOUNTANT, CPA, EA, and or Attorney! We can’t say that enough. We are not accountants, CPAs, EAs, or any form of a tax advisor. The information contained in this article and all articles on our website is for knowledge sharing only and not intended as tax advice!