One of the major purposes of investing in real estate in San Antonio and other places is to build wealth slowly over time. One of the most important ways to do so is to invest in high ROI real estate investments that are protected from US taxes.
Many real estate investors automatically decide to invest in real estate with a self directed IRA, which is a perfectly good way to invest. But there are other options that are worth considering; in fact, a solo 401k can often be superior to an IRA for investing in real estate. But most people are not aware that a solo 401k can be created by a private individual to invest in almost anything, including real estate.
Here are some things to know about the solo 401k:
- It is a one participant 401k plan, and is just like a traditional 401k plan but it just covers one ‘worker’ – you.
- Unlike an IRA, you can contribute up to $60,000 each year
- A solo 401k plan has an employee and profit sharing option but a traditional IRA has a low annual contribution limit. For those over 50, you can make a maximum contribution of $24,000 in a 401k and that can be pre tax or after tax.
- A solo 401k may be contributed to in either Roth or pre tax format, but a self directed IRA may only be made in pre-tax.
- Tax free loans: A solo 401k allows you to borrow $50,000 or 50% of the account value. You can use the loan for whatever you want. A self directed IRA cannot be used to borrow funds without it being a prohibited transaction.
- You can open your 401k at many banks yourself. But with a self directed IRA, you have to use a custodian to hold the funds.
- You do not need to make an LLC with a 401k. The plan itself may invest in real estate investments without an LLC. A 401k plan by definition is a trust, and the trustee may take title to real estate property without an LLC being formed (another expense).
- Much better protection from creditors: A solo 401k is a fortress against lawsuits and creditors. It offers far better protections than an IRA. The 2005 Bankruptcy Act will normally protect all 401k assets in a bankruptyc. Most states also have more creditor protection in a solo 401k than a self directed IRA – outside of Chapter 7, 11, or 13 bankruptcy.
Once you have established a solo 401k, you only need to decide which under market value real estate investments that you are going to invest in.