Many Solo 401k plan holders set up the plan as a way to save, and forget that it is also a way to invest. In fact, the main benefit of having a retirement plan is that it gives you tax-deferral benefits. The only way to take advantage of this tax benefit is to invest the money and let it grow as much as possible before taxes apply.
Real estate investment and other non-traditional investment options have now become one of the top choices for account holders of self-employment retirement plans, such as the Solo 401k. Choosing the right investment type is only the first step, however. To invest successfully, account holders need to do their homework. Here are a few tips to help account holders plan for better investments:
Start as early as possible
In order to invest in real estate or any other investments, we will first need to have capital. For a Solo 401k plan, account holders are allowed a very generous contribution limit of up to $52,000 per year in 2014. Therefore, investors need to know their contribution limit and maximize the amount they put into their Solo 401k per year. This way, they can grow the fund faster and have more capital available to invest.
Keep in mind that the IRS can change the contribution limit for the year to accommodate adjustment in living cost. Plan holders need to stay up to date with the newest change from the IRS. For example in 2015, the contribution limit will be raised to $53,000 per year, which is $1,000 higher than 2014 limit.
Think long term
For a retirement account, it is best to focus on long-term, passive investments. This way, plan holders can make the money work for them, while freeing themselves to focus on their main businesses or careers. Investing in rental properties or property notes, for example, are great ways to generate secure and passive income. Once the paperwork is signed, the rent or interest rate is fixed. Payments will be deposited directly into the Solo 401k account, with little to no work required from the plan holders after that.
Decide on the right asset allocation
With the variety of investment options available to self-employment retirement plans like a Solo 401k, there are endless possibilities to allocate the assets in the portfolio. Account holders who only have a few years until retirement may chose to add some target date funds into their portfolio because of the extremely low risk. Younger investors, on the other hand, may prioritize intangible assets that guard against inflation, such as precious metals. Therefore, account holders need to carefully consider their financial goals to decide on the right allocation.
Self-employment retirement plans such as Solo 401k often comes with self-directed option. This means account holders can make all the investment decisions themselves. This can help them save on custodial fees and charges, however, they will be the sole decision maker. In order to invest successfully, account holders need to know their investments inside-and-out. Joining investment clubs and read more about the topics is a good start. Also, before choosing an investment provider, such as a precious metal dealer or a real estate agent, investors also need to do their due diligence to make sure they made the right choice.