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Dr. Jamie Fettig

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Retirement SEP Accounts

One of the Lesser-Known Ways to (Legally) Give Uncle Sam the "Slip" This Tax Season

By Thomas Phelan

It's tax season again, and that means millions of Americans are reviewing their finances. Ultimately, we're seeking the answer to the same basic question: "Is there a way improve the performance of my investments AND keep more of those profits to myself, rather than handing them over to the IRS?"

The answer is "yes" on both counts.

You may have seen my past articles in ETR describing exactly how you can achieve those goals. I'm talking about harnessing the power of "non-traditional" retirement accounts that allow you to invest tax-advantaged in real estate, businesses, and other non-Wall Street fare.

There are several types of non-traditional retirement accounts to choose from, including the Solo Roth, SEP, Roth IRA, and the increasingly popular Self-Directed IRA. Each plan appeals to a different type of investor, depending upon his or her personal situation.

Today, I'd like to tell you about the Individual or Solo 401(k), as opposed to a Company or Employer-Sponsored 401(k)). It's a little-known plan that could allow you to sock away as much as $49,500 (or $99,000 total for a married couple) of tax advantaged money this year. That's far more than most plans allow, and it provides you with considerable investing power.

Who Can Benefit From the Solo 401(k)?

The Solo 401(k) is designed for independent contractors or small-business owners who have no employees. And even if you work for somebody else as an employee, you may still qualify for a Solo 401(k). If, for instance, you have a business on the side (such as investing in real estate).

Just to clarify, while your business cannot have a single employee who receives a W2 from you, you may employ contract workers who receive a 1099. And if you are married, you can be in the business together and belong to the same 401(k) plan - and, thus, you can invest together.

The Solo 401(k) is a powerful tool with several distinct advantages for investors.

7 Distinct Advantages of This Retirement Plan

With a Solo 401(k) plan, small-business owners can take control of their investment choices. That could mean putting money back into the business or buying real estate or other non-traded assets (such as notes, mortgages, or trust deeds). And, if you qualify for the plan, you may be able to sock away far more money tax-advantaged than would otherwise be possible. Let's take a look at seven of the distinct advantages you'll have as an investor with a Solo 401(k).

1. You write the checks directly from your account, which means you can fund an investment much faster than you can with a Self-Directed IRA or SEP. (No need to submit a Buy Direction Letter or Form to your IRA custodian.)

2. You can use mortgage financing as leverage and, unlike a Self-Directed IRA that holds real estate, any net cash flow won't be subject to Unrelated Business Income Tax (UBIT).

3. If you set your small business up as an LLC, with yourself as the employee, you can contribute $15,500 annually (plus an additional $5,000 catch-up if you're 50 or older) to a Tax Free Roth account inside the Solo 401(k).

4. With your business set up as an LLC, you can also (this time as the employer) defer up to an additional $24,000 in earned income into the same Tax Free Roth account inside the Solo 401(k).

5. Your spouse can be part of the same LLC that sponsors the Solo 401(k), and he or she, too, can contribute $15,500 annually into a Tax Free Roth account (plus an additional $5,000 catch-up if he or she is 50 or older).

6. There is no income "ceiling" with a Solo 401(k) plan, in contrast to other plans (such as the Roth IRA), where you cannot earn more than $110,000 as an individual or $160,000 filing jointly.

7. You can borrow up to $50,000.

In other words, you can use a Solo 401(k) account to invest far more funds tax-advantaged than would otherwise be possible. As I said, a husband and wife can contribute as much as $49,500 each for a total of $99,000, whereas an IRA or Self-Directed IRA (traditional or ROTH) has a maximum contribution of $4,000 annually (plus an additional $1,000 catch-up if you're over the age of 50). And your funds don't have to be invested in Wall Street products. You can invest in your business, or even buy real estate with a mortgage.

The Solo 401(k) can be a great option for people with a high income or a business with no employees if they are looking for a way to avoid taxes and have greater flexibility with their retirement planning.

Whether the Solo 401(k) is the best plan for you depends on your personal situation. But it is worth doing your homework to determine if you are maximizing your retirement savings with your current plan... or if there is room for significant improvements with a non-traditional plan.

[Ed. Note: Tom Phelan is a leading real estate tax-loophole expert specializing in helping individuals retire years, even decades, sooner than they ever dreamed possible. Tom travels the nation speaking to CPAs, realtors, lawyers, mortgage brokers, and individuals about 1031 Exchanges and Self-Directed IRAs. He is also the co-author of ETR's Million Dollar IRA and 1031 Exchange programs.]


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