As a real estate investor, you may have heard of the Solo 401k plan. Most investors look into the Solo 401k plan for the ability to invest their retirement savings in real estate. Plus, with this plan, the plan owner takes control and invests without having to go through a custodian.
No approval process needed and no delay. To make the most of this flexibility, however, investors and Solo 401k plan owners need to understand different rules and regulations involved. Let’s take a look at the most important Solo 401k rules to a real estate investor:
Diversification is Allowed
Not only Solo 401k plan owners are allowed to invest their retirement savings in real estate, they have many options to choose from. Most people are attracted to the steady income and value appreciation from a rental property. Others may prefer the simplicity of trust deeds or mortgage notes. Other choices include commercial buildings, farm land, and almost any legally available assets.
As it is your retirement savings at stake, the ability to choose investments that you know best is crucial. Solo 401k plan participants can also take advantage of the options available to diversify their retirement savings and lower the risks.
So is Leverage
In real estate, the first thing you learn is financing. Without timely funding, a deal cannot be executed. When it comes to retirement planning, is there any financing option?
Traditionally, it is hard for a retirement plan to obtain a loan because you as the plan owner are not allowed to guarantee for the loan. However, the Solo 401k is still allowed to take out a non-recourse loan, which does not require any guarantor. Unlike with an IRA, you can also use non-recourse financing for a Solo 401k without getting any extra tax charges. The loan would be completely tax-free and also penalty-free.
In exchange for the lack of a guarantor, non-recourse lenders may consider other factors involved. To learn more about non-recourse loans, please visit this page.
Watch out for Prohibited Transactions
All the flexibility comes with certain rules. What real estate investors need to watch out for is the prohibited transactions. For example, when investing your Solo 401k in real estate, you have to remember that you are investing on behalf of your retirement plan.
The purchased property, for example, cannot be rented out to you, or any other disqualified person. All income and expenses have to go through your Solo 401k account only. You, and other disqualified persons, are not allowed to pay for any expenses concerning the investment. That includes the closing fees, insurance, maintenance, and other expenses.
If caught engaging in a prohibited transaction, your Solo 401k plan can face a hefty fine, and in severe cases, disqualification. Therefore, consult a qualified advisor when in doubt.