Over the years, millions of real estate professionals have enjoyed the independence and financial rewards that come from a self-managed career. Having a full-time or part-time career as a real estate agent has been a great way to take control of their lifestyle and career. With the recent settlement by the National Association of Realtors as a result of multiple lawsuits brought on behalf of home sellers across the U.S., the cost of hiring a real estate agent to buy or sell a home may soon change, along with long-established rules that have helped determine broker commissions. However, with change, generally comes opportunity. The importance of using a real estate agent will not change going forward. Both buyers and sellers will continue to require the expertise of a real estate agent to help maximize their real estate opportunities.
Being Your Own Boss
One of the primary advantages of pursuing a career as a real estate agent is to be able to set your own hours, gain workplace flexibility, and be your own boss. Real estate agents are entrepreneurs who gain control of their financial future.
A vast majority of realtors are self-employed. Accordingly, a self-employed real estate will receive a 1099 with the commissions earned from the real estate agency.
There are many ways a realtor can structure their business operations. They can be a sole proprietor. Alternatively, a realtor can establish an entity, such as an LLC, C, or S corporation. The great news is that it is now better than ever to be self-employed. Not only do you can control your work/life balance, and obtain health insurance via Obamacare, but also have the opportunity to supercharge your retirement savings.
The Solo 401(k) Plan Solution
Since 2021 and the passing of EGTRRA, the Solo 401(k) plan has entrenched itself as the most popular retirement plan for the self-employed. A Solo 401(k) plan is an IRS-approved retirement plan, which is suited for business owners who do not have any full-time employees, other than themselves and their spouses. A Solo 401(k) plan is basically a regular 401(k) plan covering only one employee.
Not All Solo 401(k) Plans are the Same
As a real estate professional, when it comes to determining what type of Solo 401(k) plan is best for you, it is important to look at all the options the plan provides to make sure it will satisfy your retirement planning, tax, and investment goals.
Most banks and financial institutions will provide you with complimentary Solo 401(k) plan documents for opening an account. The Solo 401(k) plan documents are important because they dictate what you can and cannot do under the plan. Accordingly, in the case of most banks and financial institutions, the plan documents will be quite basic and will typically only allow you to make pre-tax contributions and invest in the financial products they offer, such as mutual funds.
However, for real estate professionals, seeking more retirement and investment options for their plan, such as the ability to invest in real estate, the Self-Directed Solo 401(k) plan is the ultimate solution.
The Self-Directed Solo 401(k) plan is generally offered by specialized Self-Directed companies, such as IRA Financial, who are not in the business of providing investment advice or selling investment products. As a result, the plan documents typically offer the self-employed individual very flexible retirement and investment options. For example, a Solo 401(k) plan from a traditional brokerage firm such as Fidelity or Vanguard will not offer the plan participant all the available options, such as the loan option and the ability to invest in alternative assets, such as real estate.
Below is a detailed summary of all the advantages that make the Self-Directed Solo 401(k) plan the ultimate retirement and investment solution for so many real estate professionals.
Related: Solo 401(k) for Real Estate
The Self-Directed Solo 401(k) Advantages
Higher Contributions
With a Solo 401(k) Plan, in 2024, a real estate professional can make annual contributions of up to $69,000 annually with an additional $7,500 catch-up contribution for those over age 50.
The Solo 401(k) can help real estate business professionals generate significant tax deductions as well as sock away a large amount of money each year that can be invested in real estate and much more.
Under the 2024 Solo 401(k) contribution rules, a real estate professional under the age of 50 can make a maximum annual employee deferral contribution of $23,000 ($22.500 for 2023. That amount can be made in pre-tax, after-tax, or Roth. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit-sharing contribution based on the amount of the net Schedule C amount or W-2, as applicable, up to a combined maximum, including the employee deferral, of $69,000 in 2024, an increase of $3,000 from 2023.
For real estate professionals over the age of 50, an individual can make a maximum annual employee deferral contribution of $30,500 for 2024. That amount can be made in pre-tax, after-tax, or Roth. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit-sharing contribution based on the amount of the net Schedule C amount or W-2, as applicable, up to a combined maximum, including the employee deferral, of $76,500, an increase of $3,000 from 2023.
Loan Feature
A Solo 401(k) loan is permitted at any time using the accumulated balance of the Internal Revenue Code Section 72(p) and the 2001 EGGTRA rules allow a Solo 401(k) Plan participant to borrow money from the plan tax-free and without penalty. As long as the plan documents allow for it and the proper loan documents are prepared and executed, a participant loan can be made for any reason.
A real estate professional can borrow up to $50,000 or 50% of their account value – whichever is less. This loan must be repaid over an amortization schedule of 5 years or less with a payment frequency no greater than quarterly. The interest rate must be set at a reasonable rate of interest, generally interpreted as a prime rate as per the Wall Street Journal. As of April 1, 2024, the prime rate is 8.5%, which means participant loans may be set at a very reasonable Interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.
In sum, the Solo 401(k) loan option will allow a real estate professional the ability to borrow the lesser of 50% of their account value of 50% and use those funds for any purpose, including personal or real estate investment. The real estate professional is in essence gaining tax-free penalty-free use of the funds and the loan payments are going back to their plan, instead of a credit card company.
Checkbook Control
One of the most popular features of the Solo 401k Plan is that it does not require a real estate professional to hire a bank or trust company to serve as trustee. This flexibility allows the real estate professional to serve as the trustee of the Solo 401(k). This means that all assets of the 401(k) trust are under the sole authority of the real estate professional. In addition, with a “checkbook control” Self-Directed Solo 401(k) plan, a real estate professional will have the ability to invest in traditional as well as alternative assets, such as real estate. A Solo 401(k) plan allows a real estate professional to eliminate the expense and delays associated with an IRA custodian, enabling them to act quickly when the right investment opportunity presents itself. Making a Solo 401(k) Plan investment is as simple as writing a check.
Invest in Real Estate with Leverage and Pay No Taxes
With a Self-Directed Solo 401(k) plan, a real estate professional can use nonrecourse leverage to acquire real estate without paying any tax. A non-recourse loan is a loan that is not personally guaranteed by the retirement account owner. Unlike a Self-Directed IRA, in the case of a Self-Directed Solo 401(k) Plan that uses a nonrecourse loan to buy real estate, the unrelated business taxable income (UBTI) tax does not apply to 401(k) plans as per Internal Revenue Code Section 514(c)(9). With the UBTI tax rate at a maximum of 37% for 2024, the Solo 401(k) Plan offers real estate investors looking to use nonrecourse leverage in a real estate transaction with a valuable tax-free solution.
Flexible Contribution Options
With a Solo 401(k) Plan, contributions are completely discretionary. A real estate professional always has the option to try to contribute as much as legally possible, but you always have the option of reducing or even suspending plan contributions if necessary. In fact, there is no requirement to make an annual contribution to the Solo 401(k) plan.
Roth Type Contributions
The IRA Financial Solo 401(k) plan contains a built-in Roth sub-account, which can be contributed to without any income restrictions. In addition, our Solo 401(k) plan allows a real estate professional to take advantage of the “mega backdoor Roth” option allowing them to reach their maximum contribution limit quicker all in Roth. The Solo 401(k) “mega backdoor Roth” option is the ultimate Roth solution.
The “Backdoor Roth Solo 401(k)” strategy is easy. Simply contribute to the Solo 401(k) plan up to $69,000 in 2024. After-tax contributions are one of the few exceptions to the prohibition on in-plan service distributions. In both options, one will be able to get up to $69,000 to a Roth 401(k) or Roth IRA via the Backdoor Roth Solo 401(k)” strategy.
In other words, after-tax 401(k) contributions are not treated as employee deferral or employer profit-sharing contributions and can be made on a dollar-for-dollar basis. For example, a self-employed individual over the age of 50 who makes $70,000 of income would be able to contribute $26,000 as an employee deferral, in pre-tax or Roth, and 20% of her compensation or $14,000 as a pre-tax employer profit-sharing contribution, providing her with an aggregate plan contribution of $40,000 for the year. Whereas, if the individual employed the “Backdoor Roth Solo 401(k)” strategy, she would be able to contribute $69,000 to the plan and immediately convert the funds to Roth and even roll them over to a Roth IRA without tax.
Cost Effective Administration
The Solo 401(k) Plan is easy to operate and effortless to administer. There is generally no annual filing requirement unless your Solo 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).
