Steve Sheppherd, founder of Check Book IRA covers 4 reasons why their new Survival Solo 401(k) is better than the Check Book IRA LLC. Even though both have check book control of your retirement the ability to borrow from your 401k, to contribute more each year, become your own custodian and finally to use leverage with the penalty of UDFI tax makes the Solo K a better choice for those that qualify.
4 Reasons the Solo 401(k) is Better
I just want to cover, briefly, a couple of the reasons that the 401(k)-- solo k, is better than the checking IRA. If you're able to qualify by being an employer/employee with no other employees other than, you know, owners, except your spouses are allowed, there are several things that are really cool about the solo k. Number one: you can put a lot more money in and shelter it from taxes. In the IRA, you can put like $6,000 a year. So you and your wife could put in, like, 12. But with the solo k, you could put up, you and your wife, depending on your age and how much money you make, you can put in up to $118,000 a year sheltered. And as soon as it goes in, it goes into the plan and you're the administrator so you can instantly invest it in something. So that's a win (?)0:53 . Number two: you have no custodian, there's no custodian involved whatsoever. You are the plan administrator, you open an account and that's where the account is, there's no custodian. You don't have to ask anybody. You have a plan, that we draft up, that's approved by the IRS that gives you the authority to do all these things as a plan administrator-- how much money can be put in, what investments can be done, and you have no custodian over it. None. So that plan is local and you can set up in your local bank account. Reporting is negligible until you get to have $250,000, you don't even send a report to the IRS. There's no tax return, because there's no LLC-- you don't have that. You're writing checks out of the plan, so you don't need an LLC. You can add one if you want to, but you don't need one. The next thing is, this is really cool if you're buying real estate, if you leverage real estate with an IRA, whatever percentage is leveraged-- like, let's say you leveraged 60% of something, so that'd mean you'd put down-- let's say it was $100,000, you put down 40 grand out of your IRA and you borrow $60,000, then 60%, excuse me, of the profits were earned by non-IRA money. Therefore 60% of the profits are taxable and it's a pain. You know, it's not-- and it can be a pretty healthy tax, that it's kind of, you know, it's a headache. Now, with 401(k) there is no (?)2:31 tax like that. None. So you put down $1,000 on $100,000 property, and you make-- you double your money. You got $200,000 now, you've got in your account-- it's all treated like it's IRA money. There's no (?)2:46 tax at all, none. Zero. You don't even have to report it. SO that's, you know, that's really outstanding. And then finally, with an IRA, if you needed some money to do a deal, personally, or maybe you need a little money for a little bit, you can't touch it with an IRA. Now, you can pull it out for sixty days, once every twelve months-- not once a year, once every twelve months. So if you pulled it out in February, you can't pull it out next January, you have to wait until February rolls around. But you've got sixty days to get the money back in. With a 401(k), you can borrow up to half of the amount that's in your 401(k) plan, up to a maximum of $50,000. That can be personal-- it's just borrowed out. You pay, you know, hardly any interest and you structure the loan. You're the guy that does it, you're the plan administrator. You approve that loan and it's totally legal. So you can take that money, maybe put a kid through school and then pay it back later, whatever. So that's another advantage. So there's certainly some advantages with the solo 401(k). Cost is about the same as a checkbook IRA to set it up and on an annual basis. So if you can qualify for that, that's the reason that the solo k is really gaining popularity.
No Reporting To: Custodian State Feds
The annual reporting for a solo 401(k) is minimal. If your plan, even if you have you and your spouse are in there, or you and two other owners-- because, remember: you have to be an owner and an employee. You can have no employees that are not owners-- but even if you have multiple parties in there, until the plan reaches $250,000, there is no reporting to the IRS whatsoever. But once it reaches $250,000, there is one form. We will do it for a fee. But it's not hard to fill out, it's called Form 5500, and basically it's just telling the IRS, "Yes, everything's the same. The company's the same. The employers and employees are the same. The bank account's the same. We haven't changed our plan documents and yada, yada..." You know, it's just a reporting, it's not a big deal-- and how much funds, how much is in there. Not what the plan is invested in-- you don't have to disclose that, just, you know, it's very, very minimal. So the reporting for a solo 401(k) is awesome. If you don't have an LLC, there's no annual fee to pay to the state, there's no reporting to be done there. You have no custodial to answer to. So in that case, reporting is very, very minimal for a solo 401(k).
Add an LLC to Solo (k)
Some of our clients with the solo 401(k) would like to add an LLC. Perhaps for anonymity, they just-- that's what they want to do and that's not an issue at all. As plan administrator, you can approve an investment of the 401(k) into an LLC that we create and we set it all up, then you can be the manager, and now one of the advantages is that when you buy property, for example, it can be in the name of the LLC. And that can be very anonymous. For example, it could be, you know, Spartan Investing LLC, you know, as opposed to buying a property directly with your plan where there it would say, you know, Steve Shepard Investments 401(k) Plan and so there it is-- it's in the courthouse, it's in the paper if it has to be published publicly so it's there for the whole world to see. Where an LLC can give you more anonymity. It doesn't give you, really, any more control, because as plan administrator, you have the checkbook control and you sign the documents. But it can be added, a little more expense, a little more expense on an annual basis, but really no more reporting and it's a real good fit for a lot of our clients.
Borrowing From Your Solo 401(k)
Another real advantage of the solo 401(k) over an IRA is the ability to borrow money from your 401(k), personally. Not an investment, you know, obviously you can do that. You're the plan administrator; you can invest in anything but life insurance and collectibles. But if you need money, personally, maybe you want to fix up the house or you need a little money for a while for your child's education, you don't have to work with a solo 401(k). You can borrow, according to the law, up to half of your 401(k) to a maximum of $50,000. So if you have 40 grand in there, you can borrow 20. If you have $100,000 in there, you can borrow 50. If you have $200,000 in there, you can only borrow 50. Now, if you and your spouse happen to be set up and we do your plan document, then we can structure it to where you and your spouse can each borrow up to that so, actually, you and your spouse can borrow up to $100,000, personally, out of your retirement. And, you know, sometimes this is a great way to make money for your retirement if you have some real high credit card bills, for example. Borrow that money out, pay that debt down, and then, over a period of time, you know, make the payments back to the 401(k). I might as well pay them the high interest than my credit cards. So there's lots of different ways that the personal borrowing clause will work and we always put that in our plans.