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*Disclaimer: I am not in any way shape or form a license tax professional. I am in no way advocating dodging tax laws – this serves as an informatory post and use of the information should be consulted between you and your own tax professional*
Traditionally, 401k’s have been a slowlaner’s way to retire. Invest for 40 years and in turn, you can retire at the age of 60.
The $18,000 tax deferred income is the biggest benefit, but your capital is unable to be withdrawn and touched without penalties. The only access is through a loan taken out on the account which is limited to 50% of your account balance.
What would you say if you could save an extra 10% to 30% of your net income? What if that doesn’t limit the amount of working capital at all? On top of it, what if that money was accessible for most investments of your choosing?
Enter the Self-Directed Solo 401k
What is a Self-Directed Solo 401k? It is two types of 401k accounts squeezed together.
First is the Solo 401k – this option is available for sole employee business owners. This is great for those who run small to medium ecommerce businesses / hire contractors to do jobs rather than have staff on payroll. How does it work?
As with any 401k, you can place up to $18,500 of your personal income, tax deferred.
But because you are also the owner of a single member business, you are allowed an employer nonelective contribution (aka profit sharing) of 25% of your net profit.
The maximum contribution of both cannot exceed $54,000. Ultimately, because you run your own business, you can gain an additional $36,000 deferred from taxes.
Which brings me to the next plan: The Self-Directed 401k
Why is this beneficial?
How can we grow if our cash is tied up in a 401k account? Won’t it be penalized?
This is the beauty of a self directed solo-401k – there are two options available or using capital:
1. Just like a traditional 401k, you can take out a loan up to 50% of your total account balance. This money is paid back to yourself on a schedule with interest. No tax penalties. 50% of your capital is freed up, and in the end, your investment account grows due to interest.
2. The applications for entrepreneurs are staggering. Investments can be, but not limited to, stocks, bonds, options, real estate, and crypocurrency. This is how we can get past not accessing a 401k account until after 60 without tax penalties.
This website paints a pretty good picture about what you cannot invest in: https://www.mysolo401k.net/prohibited-transactions-solo-401k/
For example, I run an ecommerce business and have a slowlane job:
Slowlane Income: $120,000 | Business Net Profit: $80,000 | Total Income: $200,000
I created a spreadsheet that I will attach to this post. Below you can see the difference between being taxed and using a solo-401k.
As you can see, by injecting $38,500 into a tax deferred account, I can save from $14,000 in tax dollars, but I also drop my income backed, saving me an extra 5%.
Ultimately, I pocket an additional $24,360 that I would have paid in taxes. The only drawback is that I lose $14,000 in working capital, but that is offset by the fact I can take up to $19,250 out as a loan from my 401k.
Then there will be an extra $19,250 in the account to use towards other investments.
My plan is to use the first 50% as a loan to provide working capital for inventory while lowering my tax bill/tax bracket. Once my cashflow can cover all capital costs through Q4, I can use what money has built up as inventory capital, as a down payment on a home with a 10 year repayment.
Additionally, as my account grows, I can continue to use the other 50% towards investments, probably crypto-currency, and ideally ending up in investment real estate.
Make your money work for you, not against you!
*Again. I am not a CPA. With anything regarding tax laws, it is wise to speak to your own tax professional to get a better understanding of what is and is not legal.*
Traditionally, 401k’s have been a slowlaner’s way to retire. Invest for 40 years and in turn, you can retire at the age of 60.
The $18,000 tax deferred income is the biggest benefit, but your capital is unable to be withdrawn and touched without penalties. The only access is through a loan taken out on the account which is limited to 50% of your account balance.
What would you say if you could save an extra 10% to 30% of your net income? What if that doesn’t limit the amount of working capital at all? On top of it, what if that money was accessible for most investments of your choosing?
Enter the Self-Directed Solo 401k
What is a Self-Directed Solo 401k? It is two types of 401k accounts squeezed together.
First is the Solo 401k – this option is available for sole employee business owners. This is great for those who run small to medium ecommerce businesses / hire contractors to do jobs rather than have staff on payroll. How does it work?
As with any 401k, you can place up to $18,500 of your personal income, tax deferred.
But because you are also the owner of a single member business, you are allowed an employer nonelective contribution (aka profit sharing) of 25% of your net profit.
The maximum contribution of both cannot exceed $54,000. Ultimately, because you run your own business, you can gain an additional $36,000 deferred from taxes.
Which brings me to the next plan: The Self-Directed 401k
Typically, a 401k account is granted by an employer and managed by a large investment firm (ex. Transamerica). Money is then split between stocks and bonds and given a steady ROI over many years. Hands off. Hands free. Slowlane paradise.
When you elect to create a self-directed 401k, instead of running your retirement account through a firm like Transamerica, you create your own account through the bank of your choosing and ultimately are responsible for the investments in which the money flows into.
Put the two together and you get up to $54,000/year, tax deferred account which you control the investment opportunities that are not limited to just stocks and bonds.
And you get to lump sum it on Dec 30th if you choose to do so. Working capital throughout the year in tact.
When you elect to create a self-directed 401k, instead of running your retirement account through a firm like Transamerica, you create your own account through the bank of your choosing and ultimately are responsible for the investments in which the money flows into.
Put the two together and you get up to $54,000/year, tax deferred account which you control the investment opportunities that are not limited to just stocks and bonds.
And you get to lump sum it on Dec 30th if you choose to do so. Working capital throughout the year in tact.
Why is this beneficial?
The Commandment of Control. The IRS does not say what you can invest in, only what you cannot invest in. Which means we are free to use tax-deferred dollars to fund investment opportunities. Opportunities that can make our capital grow much faster than a traditional 401k.
How can we grow if our cash is tied up in a 401k account? Won’t it be penalized?
This is the beauty of a self directed solo-401k – there are two options available or using capital:
1. Just like a traditional 401k, you can take out a loan up to 50% of your total account balance. This money is paid back to yourself on a schedule with interest. No tax penalties. 50% of your capital is freed up, and in the end, your investment account grows due to interest.
2. The applications for entrepreneurs are staggering. Investments can be, but not limited to, stocks, bonds, options, real estate, and crypocurrency. This is how we can get past not accessing a 401k account until after 60 without tax penalties.
This website paints a pretty good picture about what you cannot invest in: https://www.mysolo401k.net/prohibited-transactions-solo-401k/
For example, I run an ecommerce business and have a slowlane job:
Slowlane Income: $120,000 | Business Net Profit: $80,000 | Total Income: $200,000
I created a spreadsheet that I will attach to this post. Below you can see the difference between being taxed and using a solo-401k.
As you can see, by injecting $38,500 into a tax deferred account, I can save from $14,000 in tax dollars, but I also drop my income backed, saving me an extra 5%.
Ultimately, I pocket an additional $24,360 that I would have paid in taxes. The only drawback is that I lose $14,000 in working capital, but that is offset by the fact I can take up to $19,250 out as a loan from my 401k.
Then there will be an extra $19,250 in the account to use towards other investments.
My plan is to use the first 50% as a loan to provide working capital for inventory while lowering my tax bill/tax bracket. Once my cashflow can cover all capital costs through Q4, I can use what money has built up as inventory capital, as a down payment on a home with a 10 year repayment.
Additionally, as my account grows, I can continue to use the other 50% towards investments, probably crypto-currency, and ideally ending up in investment real estate.
Make your money work for you, not against you!
*Again. I am not a CPA. With anything regarding tax laws, it is wise to speak to your own tax professional to get a better understanding of what is and is not legal.*
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