3 Real Estate Investing Tips with a Solo 401k Plan
Setting up a self directed Solo 401k can help plan owners take a step toward a better financial future. However, it is only the first step. Once the retirement plan is set up, the plan owners still need to make sure the plan is invested wisely to provide growth and earnings.
Investing in real estate is one of many Solo 401k investment strategies. To maximize the growth and potential of a Solo 401k plan, plan holders need to do their due diligence. Here are a few real estate investing tips to help Solo 401k plan owners succeed:
Get an early head start with Solo 401k contributions
Before you invest in real estate, the Solo 401k plan needs to accumulate enough funds. One of the biggest advantages of a Solo 401k plan is its generous contribution limit, which totaled up to $59,000 a year in 2015. This limit varies based on the plan owner’s age, income level, and the type of business that sponsors the plan. However, one thing will not change: the earlier you start to contribute, the more funds you can accumulate in the account.
Long term and passive investments
Investors can often choose among many real estate investment options when investing with their personal funds, including wholesaling and house flipping. When investing with money from a Solo 401k plan, or any other retirement plan, however, certain options are better than others. Wholesaling, for example, can be done but it may be considered an active business and the Unrelated Business Income Tax (UBIT) will apply.
When investing Solo 401k funds, plan owners will do best with passive, long-term investments that do not require active management from the plan owners. These include mortgage notes, trust deeds, and rental properties. Certain investment structures, such as turnkey properties, can also help avoid prohibited transactions.
Become an educated investor
Many real estate investors often prefer self-directed retirement plan options, such as the Solo 401k plan for real estate investors and the Checkbook IRA LLC. These options give plan owners the ability to gain control of their retirement funds. They can then make investment decisions without getting approval from any custodian or fund manager.
This flexibility also comes with responsibilities. The plan owners will be put in the driver’s seat and therefore, will be solely responsible for their plan. In order to invest successfully, plan owners need to educate themselves on different investment options and perform needed due diligence. As the plan trustee, they are also required to know their responsibilities and avoid engaging in a prohibited transaction. When in doubt, it’s best to consult with a qualified professional about the Solo 401k rules and regulations.
Ventures Realty provides acquisition and disposition services for Ventures 5280 (parent company), a boutique real estate investment management firm that sponsors and operates Airbnb short-term rental and vacation home rental investments for equity partners and accredited investors.