Why the Solo 401K Is A Small Business Owner’s Best Friend

Why the Solo 401K is a Small Business Owner’s Best Friend

As an entrepreneur, you question if your business is living up to its full potential and setting you up for a worry-free retirement. After all, the countless hours of hard work demand a robust pay-off that you can count on during retirement!

What many business owners are unaware of is that you can actually use your business earnings to fund the type of retirement you’ve been craving, by investing in real estate with the solo 401K. This option comes with two excellent features: 1) it allows entrepreneurs to build their retirement savings and 2) it gives them the opportunity to purchase real estate investments with tax benefits.

This helpful guide discusses the key components of this business owner’s best friend.


Solo 401K Basics – What You Need to Know

Before being able to use your Solo 401K to purchase real estate, you need to have an existing account or you need to set one up. Here’s what you need to know in order to set one up properly:


A Solo 401K is a retirement plan designed specifically for self-employed individuals running a sole proprietorship or small business without any full-time employees (other than a spouse or immediate family member). It’s also available for sole owner-employees of corporations.

The Solo 401k option is appealing to many, as it allows self-employed business owners to make contributions as both an employee and an employer (through a profit-sharing contribution option).

However, there are some rules and restrictions that come with this dual retirement savings option that you should be aware of.


To be eligible, you need to show proof that you’re self-employed and do not have any full-time employees that are eligible for a 401k contribution.

Additionally, you must follow these regulations:

1. The maximum annual contribution you’re allowed to make under the employee elective deferral option (what you contribute to your Solo 401K as an “employee”) is $18,000 for a person under 50 and $24,000 for someone 50 and older.

2. The profit-sharing option (i.e. the annual contribution to your Solo 401K under the category of “employer,” that is paid from your yearly business income) is capped at 25%, if incorporated (20% for a Sole Proprietor, Schedule C tax payer, or unincorporated business). For instance, if your business earned $100K for the fiscal year, your contribution— as an employer— would be capped at $25K or $20K for a Sole Proprietor or Schedule C tax payer.

As of recently, if you’re under the age of 50, the sum of both contributions (the employee elective deferral option and profit sharing) is capped at $53K per year; while 51 years of age or up have an annual cap of $59K. This allows those closer to retirement age to save more quickly.


How to Use a Solo 401K to Invest in Real Estate

In addition to helping small business owners save for retirement, Solo 401Ks can be used to fund real estate investments. Even better is how these property purchases can initially serve as a tax shelter for investors.
Here are some other reasons to use a Solo 401K to invest in real estate.

Benefits of Using a Solo 401K to Fund Your Investment

1) Tax-free/Tax-deferred profits: In most cases, you can defer taxes for many years, as any income/gains generated by a 401(k) are either tax-deferred or tax-free. Using a Solo 401(k) to purchase real estate allows you to earn tax-free income/gains on those properties (you pay the taxes at a future date, rather than during the year the investment produces income).

2) More Options: You can invest across broad categories of real estate, both domestic and abroad. Options include residential and commercial properties, raw land, tax deeds, and many others.

What You Need to Know

When funding real estate investments with a Solo 401K, account owners, their spouse, parents, grandparents, children and spouses, and grandchildren and their spouses aren’t allowed to receive any personal benefits from their investments (see a full list of disqualified parties here). This means that any properties purchased must be for renting and/or fix and flip (as long as the work is done by a third-party) not used as the primary residence.

As an account holder, you cannot provide any services or perform any work yourself. It is required that it be done by an unrelated third-party person or vendor. This means you cannot even change a lightbulb on your rental property!

Additionally, the list of disqualified people cannot use the property for any personal benefit such as a vacation home.


Setting up a Solo 401k, Hands-Free

The Solo 401K— while an excellent investing option— can be very time consuming to set up because (just like any other financial process) there are many details that need to be worked out. So why not let someone else do the heavy lifting?

HomeUnion® enables you to buy real estate hands-free with a Solo 401K. Our Solution Managers assist you in opening, maintaining, and utilizing this option to purchase investment properties.

Here’s how the process works:

  1. Schedule an Introductory Call. We discuss your goals, answer your questions, and send you a sample portfolio of properties.
  2. Meet our IRA Financial Partner. We quickly introduce you to our IRA Financial Group partners, who then sets up the Solo 401(k) on your behalf.
  3. Receive and Approve a Custom Portfolio. HomeUnion® sends you a custom portfolio of available cash flow properties that match your goals. All you have to do is finalize the properties you want to move forward with.
  4. Sit Back and Relax. HomeUnion®’s team starts the acquisition process and handles all the details of acquiring the properties
    on your behalf. We make sure that the title to the investment property and all transaction documents will be in the name of your Solo 401(k) plan and signed by you, as a Trustee.
  5. Celebrate! Congratulations, you just purchased real estate investments in growing markets across the United States, tax-free. You’re now an Investor, Not a Landlord.

Get Started Today

Maintaining a thriving business is hard work! So let us handle the additional details that will enable you to retire comfortably. Start the real estate investing process through your solo 401K by calling 888-276-0232 or scheduling a consultation today.

Have Questions?


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