What is a Roth Solo 401K Plan?

A Roth Solo 401 K Plan is the ultimate tax-free retirement solution for people with self-employed income. Why is that? Knowledge is power and by combining the information below, it will become apparent why a Solo Roth 401 k Plan is so important.

Roth 401K

Unlimited Investment Opportunities

With a Roth Solo 401K you can make almost any investment tax-free, and after reaching the age of 59 ½ you can live off your Roth 401 k assets without worrying about paying taxes. Investments can include real estate, tax liens, precious metals, currencies, options, and private business investments.

Two Funding Methods for a Solo Roth 401 k Plan

One – declare your personal contributions as Roth or “after tax” meaning the contribution has already been taxed and not tax-deductible as in a traditional plan. You simply write on the memo line of your contribution check “Roth”.

Two – you can convert traditional funds already in the plan to Roth. This is very easy to accomplish and does not require a distribution. It will be an “in plan” conversion.

Combining Roth and Leverage

The combination of using a Solo Roth 401 k Plan and non-recourse loans for real estate investments represents the best of all worlds. First, any qualified Roth distribution is tax-free, which is great on it’s own.

Second, there is a little known quirk in the IRS rules affecting leveraged real estate transactions inside a 401 k. This will take a little explaining. Self-directed IRA’s and 401 k’s are allowed to borrow money for any investments. However the proportion of the profits relating to the loan will be subject to (UBIT) Unrelated Business Income Tax, which is approximately 35%.

YouTube Preview Image

UBIT does NOT apply to leveraged real estate transactions inside a 401 k plan, however it DOES apply to self directed IRA’s. Here is the only reason the IRS states for the exemption of 401 k’s and not IRA’s “Trustees of these (401 k) plans are desirous of investing in real estate for diversification and to offset inflation. Debt-financing is common in real estate investments.” So IRA’s get taxed and 401 k’s do not.

To borrow or leverage using a Solo 401 k plan you must use a non-recourse loan. This means the owner of the plan cannot personally guarantee the loan. The lenders know this and their only recourse is the property they are lending against. Non-recourse loans can be from a bank or private. Banks will have loan to value (LTV) restrictions where private non-recourse loans have none.

So now let’s combine a Solo ROTH 401 K Plan and Non-Recourse Loans.

If your Solo Roth Plan is five years old and you have reached the age of 59 ½ then any distribution is deemed “qualified” and non-taxable. If you have used a non-recourse loan for a real estate investment, UBIT does not apply. So, no UBIT and no income tax – the ultimate tax-free retirement tool.

This exemption provides a significant tax advantage for owners of a solo Roth 401 k plan vs. a self directed IRA.

Offset the Cost of Your Plan

In addition to the above, the cost of your plan and annual fees are tax-deductible.

At Self-Directed Retirement Plans LLC, we “graduate” quite a few of our new IRA questioners to Solo Roth 401 k Plans.

Please don’t hesitate to call or email us if you would like to learn more.