The Ultimate Real Estate Agent’s Guide to Solo 401k Rules
You love real estate, so being a real estate agent is a dream career come true. But when it’s time to hang up your hat, will you financially be ready?
It’s a question that has plagued man self-employed professionals, such as real estate agents. After all, just as you want your family to remain financially secure now, you want to be financially secure during your golden years, too.
Fortunately, a Solo 401k may be the perfect solution for you. Of course, if you’re a real estate agent who’s considering a Solo 401k, you need to understand how it works. We’ve compiled a guide on the Solo 401k rules you should know.
Let’s get started!
What is a Solo 401k?
A Solo 401k is a flexible and tax-efficient retirement solution designed to give you a wealth of wonderful investment opportunities as a self-employed professional. It is only for those who do not have employees. However, your spouse can contribute to it if he or she makes money through your business.
It works similarly to the Traditional 401k plans that large companies offer their employees. It also mirrors the Simplified Employee Pension Individual Retirement Account (SEP IRA) made for self-employed workers.
In addition, like IRAs, the Solo 401k comes in both a Roth version and a traditional version. The traditional kind allows you to invest pretax funds and then pay taxes on them when you make a withdrawal. Meanwhile, the Roth type kind allows you to invest after-tax dollars, so you don’t have to pay taxes when you withdraw your funds later.
Solo 401k Rules
What’s so great about a Solo 401k is that you can invest funds into just about any kind of investment. You don’t need the consent of a custodian.
For example, you can invest in tax liens, tax deeds, mortgage notes and real estate. In other words, your investment options are virtually limitless. This is wonderful news if you’re sick of investing only in stocks and prefer real estate-related investments as well.
Another reason to use a Solo 401k? The maximum contribution limit is $55,500 per year. In addition, you’re allowed to borrow half of your assets, as long as the amount doesn’t exceed $50,000 of your invested funds.
Like other retirement savings vehicles, the Solo 401k is a handy tool for estate planning and asset protection purposes. It’s particularly ideal if you want to stow away a large sum of money. This is because these plans enable you to save as an employee and as an employer, so you can contribute much more than you could with other types of retirement plans.
Retirement Saving Example
You decide to save $18,000 in your Solo 401k as an employee. In this situation, you can also save an extra 25% of your compensation as a boss — up to the $55,000 amount mentioned above (which includes your $18,000 employee contribution).
The great thing about saving money in this way is that your contributions are always discretionary. Therefore, you can stash away the maximum amount during years of plenty and then scale back on your investments during tougher times.
Also, if both you and your husband or wife are in your plan and you’re 50-plus years old, you’re eligible for $6,000-per-person catch-up contributions.
Accessing Your Funds
Expect to keep your Solo 401k funds invested until age 59.5. If you decide to take money out early, you’ll have to pay a penalty of 10% as well as income taxes on your withdrawal. And income taxes apply even if your Solo 401k is a Roth one.
However, you might be able to make a withdrawal before age 59.5 in certain situations as follows:
- Covering particular medical expenses
- Making payments to avoid foreclosure or eviction
- Covering college costs
- Buying a house
- Covering funeral costs
As we mentioned earlier, rather than actually withdrawing money from your retirement plan, the best move is to simply take out a loan. In this way, the rest of your funds will remain invested so that they continue to grow.
So, you’re now convinced that you need a Solo 401k to help you to prepare for the future. But what investing moves should you make?
As we mentioned earlier, you can take advantage of the opportunity to invest in real estate. However, you shouldn’t neglect other asset classes. The power of diversification is that it will smooth out the volatility of your Net Worth overtime. Historically equities have offer the best opportunity to produce returns that will outpace inflation. Real Estate returns can be great when you include the leverage, but you can have too much of a good thing a la the housing crisis.
You can also add cash or bonds to the mix, as this will decrease your holdings’ overall volatility.
Although Solo 401ks feature many benefits, these plans do require a larger amount of paperwork compared with your SEP IRAs.
In addition, if the amount of money in your account surpasses a certain figure, you’ll have to file a special type of tax return for your plan. This can, unfortunately, make your tax-preparation time slightly more costly and be an added hassle.
Another important consideration is that some firms that set up clients’ Solo 401ks levy charges for doing so. These charges can reach a few hundred dollars based on your account size as well as the service level you receive. You should also expect to pay yearly fees as high as $400.
In addition, even though you’re legally allowed to borrow 50% of your Solo 401k assets (up to $50,000), not all providers offer loan options. Of course, it’s not recommended that you make an early withdrawal from your retirement plan anyway. But it’s still good to have the monetary safety net you get with a loan option.
Where do you find solid advice?
Registered Investment Advisory firms like, FamilyVest, provide fiduciary fee-only holistic financial planning. Our goal is to help you to succeed financially from the start.
Get in touch with us to find out more about Solo 401k rules and benefits.