Solo 401k or paying the additional tax??

Question

Hi BP,

Had an interesting convo with someone the other day debating the Solo 401k option for self employed individuals or taking the annual tax hit but keeping your cash more liquid to actually purchase rental real estate to reduce your taxable income with every additional acquisition .

What are you doing?

A little background, for my taxes this year I was able to save $12,500 in taxes if I contributed $28,000 to my solo 401k account.  No brainer right?

Sometimes not.  It takes the "rainmaker" or the person I trust the most (ME), out of the deal.  You cannot be involved with the transaction at all, if you want to obide by the rules (which I know a lot of people do not follow when it comes to these self directed accounts).

I think the key is having someone you truly trust to lend the monies to, or obviously finding a bank to do a non-recourse loan.

Curious what everyone else would do?

Cheers,

Cassidy Burns · Answer

@Jody Sperling you and I have similar views, and what's the current cash flow opportunity cost of the $15,500 that I could produce for now and then as you said , future appreciation for my future self. I too am using a whole life and leveraging that as well, along with a HELOC on a primary that I purchased 4 years ago. I'm leaning towards paying the tax burden and keeping the cash for now and just reallocating it now on a $100,000 property in the market that im already investing in .

Thanks for the feedback

Zachary Beach · Answer

@Cassidy Burns do you qualify as a real estate professional. More than half your time more than half your income for the year and over 750 hours working on real estate. Agent commission and rental income count. If you qualify you could just buy a rental property get a cost segregation study and get 10-40% of the value of the structure in first year depreciation plus extra after that. So if you put 50k down on a 250K house with structure of 200K that you get 25% depreciation the first year your whole 50k is deducted off your taxes for that year.

Jody Sperling · Answer

I'm the radical sort who doesn't believe 401ks are a good investment. For example, in your situation, you could have saved $12,500 in taxes this year, but how much will you pay on the money you put in the 401k by the time you begin taking distributions, because you'll be taxed on a larger base then, and likely at a higher rate.

Roth IRAs are no more exciting, because they're funds you remove from yourself to cashflow today. I only invest in assets that cash flow me today and equity fund my future self. Real estate is a great asset that meets that requirement. Dividend paying ETFs can be a good asset to meet that requirement. Properly structured Whole Life Insurance is a great asset that compliments that requirement. Those are the three buckets I put all my money into.

Brad Nelson · Answer

As an investor myself, we use a vehicle that allows you to roll in any qualified funds without paying taxes or early withdrawal penalty. You can then use those funds to invest in what ever you want with no limiting transactions or contribution limit. It is like a Roth on steroids.

John Underwood · Answer

I prefer to not save on the taxes now. I use a self directed ROTH and a Solo401k ROTH.

I'd much rather pay the tax now and grow my investments like crazy and not have to pay tax on the substantial gains I'm making.

Pay tax on the seeds not the crop.

Zachary Beach · Answer

@Cassidy Burns no it’s not 401K related. It’s just the tax code and they are no limits to the potentially depreciation you can deducted there are people doing 100’s of millions maybe even billions yearly. It also doesn’t have the downside of waiting until you are “retirement age” to use it. You can use the rental income the whole time or keep reinvesting it.I don’t even have a 401K any more because it’s counterproductive for my personal financial situation particularly because I qualify as a real estate professional. There are many draw backs to the “taxed advantaged” government accounts like 401K. Everyone’s situation is a bit different and there are people that 401K is probably a good move for but much better options exist. If your a full time agent I would look into it as you should qualify and it could bring your income tax rate to 0%

Todd Goedeke · Answer

@Cassidy Burns , you can own RE without active ownership. When you lease a property to someone else that is allowable within a Solo 401k without penalty; passive income.

Todd Goedeke · Answer

@Cassidy Burns , you can own RE without active ownership. When you lease a property to someone else that is allowable within a Solo 401k without penalty; passive income.

Cassidy Burns · Answer

Hey @Zachary Beach is this through the Solo 401k product ?

@Todd Goedeke via the law you cannot be directly involved with the investment correct ? Short term Rentals is not my business model so I won't be going that direction.

and in my opinion Whole life insurance has its place for certain individuals, to each is own on this!

Todd Goedeke · Answer

@Jody Sperling, @Cassidy Burns you are both mistaken regarding investments allowed in a Solo 401k. You can have RE in a Solo401k. You can have a commercial property yielding 10% as a master lease whereby all current and future cash flow and capital gains are tax free in your Solo401k plan.

All. RE, especially short term vacation rental property , can be owned and maintained as a passive investor.

One can even take a tax deduction now from contributions made and later covert to a Roth within Solo 401k.

The worst investment to make is not an investment at all but life insurance wrapped in a special wrapper called whole life ins.

Solo 401k or paying the additional tax??

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