Everyone has heard about 401ks. They are the go-to way that companies assist their employees in saving money for retirement as a part of their compensation plans. What you might not know, however, is that there is a way to use that money to work for you using your own knowledge and while building cash flow for your retirement via alternative investments at the same time.
There are two special types of 401k which enable you to do this. The Solo and Self-Directed 401k. Both of these types offer the same tax benefits as the traditional 401k, but there are some specific requirements for these two types, so let’s start by explaining the Solo 401k.
The Solo 401k is a special type of 401k known to the IRS as the One-Participant 401k. It was created by the IRS to help self-employed individuals save for retirement. You can only have a Solo 401k if you are self employed and have no employees, spouse excluded. Because as a self-employed individual you are not receiving contributions from an employer, your annual contributions are much higher than a standard 401k. For 2021 the annual contribution can be as large as $58,000. The other big advantage of the solo 401k is that since you are technically the employer administering the 401k, you can utilize the funds for many different types of investments including rental properties. There are many other regulations that the IRS has set up for the solo 401k, so if you are interested you should carefully research the specifics before creating one.
Turning to the Self-Directed 401k, this form is applicable to more people than the Solo. It functions exactly like a standard 401k, but instead of the employer choosing the investment options, you are able to place them virtually wherever you wish. Alternative investments you could utilize include real estate, tax liens, precious metals, and many more. Much like the Self-directed IRA, a self-directed 401k must have a custodian who oversees, but does not actually manage, the funds in the account. The primary way you can obtain a self-directed 401k is by your employer offering it as a part of their compensation plan. In this case the custodian is the plan administrator. In this case you might even be able to get employer contributions to help grow the funds in the 401k so that you can make larger investments. Its very important to note that you must keep an arms length away from the funds in the 401k, so you cannot use them to buy yourself or your family a home or use your personal funds to improve properties held in the 401k.
Though there are some fees and regulations to contend with when using these two 401k types, they can offer you significant investment gains and help you build cashflow for retirement. If you are interested in either of these 401k types, you should do some further research to make sure its right for you.
Financial Analyst Intern