John explains why self-employed people and business owners should open a Solo 401(k) instead of a traditional IRA. You can contribute up to $69,000 a year, choose Roth or traditional options, and it works for real estate agents, Uber drivers, and anyone with self-employment income.
In 2024, when you're under the age of 50, if all of your cards are being played right, you can actually get upwards of $69,000 into the solo 401k. And when you're 50 and over, that amount is 76, 5, $76,500.
I want to touch on before we go too far off this topic, solo 401ks. A lot of our investors are business owners and high net worth individuals. They've started to learn about solo 401ks. And I @ the most recent conference asked you, John, do you do solo 401ks? And you said yes. Can you speak to them and explain simply what they are?
Absolutely. You are correct. As a self directed custodian, we've been doing this for 50 years. We service all sorts of retirement plans. Solo 401ks are one of the account types. If you are a business owner, you're self employed. And when I say you're self employed, let's define it a little bit further. Let's assume that you're self employed with earned income. Earned income would mean income that you're paying Medicare and Social Security tax on. So I could say that I'm self employed outside of Equity Trust with a portfolio of rental properties. Now the problem with that is all of those rental properties are just generating passive income. I'm not taking any management fees. I'm not paying any Medicare, Social Security tax. So if I wanted to try and go form a solo 401k for my business over here, that it just holds rental properties, it's not going to work. In fact, the IRS guidelines say that I can't even do that. So there's two things that call it prerequisites. The first prerequisite to have a solo 401k would be you have to be self employed. And it doesn't mean you have to have an LLC or an S corp or a limited partnership or a corporation. It could just be you doing business as yourself. You know, a great example of this is an Uber driver. You know, most Uber drivers are not, you know, incorporated or have an LLC as long as they don't have a bunch of deductions and mileage that they're writing off that wipes out their income. They're likely going to pay some self employment tax and they could open in theory a solo for a 1k. Now what about people in real estate? All right, because I'm assuming most people here are not interested in Uber driving. They're probably interested in how do I create wealth through Entrepreneurship and real estate investment. So let's look at like a real estate agent. That's a great example. If you're a real estate agent, you got commissions, inevitably you're paying some payroll tax, Medicare and Social Security. Okay, you're in the game. You open up a Solo 401k and you can start deferring money in there. There are some other things we need to work through, but by and large that's a great sort of use case for that. The second item to think about with the Solo 401K and that you got to be aware of is that you can't have any employees. Can't have any W2 employees. There are a couple exceptions to that. The first exception would be your spouse, which is interesting. You could employ your spouse, pay them, and then they can make contributions to the solo 401k as well. So now you got more tax free dollars that can continue to grow tax free in the family unit, so to speak. The other exception would be business owners. So if you have other partners in the business and you don't have any W2 employees, it's just you being W2 employees and business owners, you're going to probably open up a solo 401k. So a couple of things I wanted to make sure I reference there and I'll mention that if you don't qualify for a Solo 401k, but you have existing retirement funds, that's okay. Maybe your plan to self direct into private market deals is to roll over your existing retirement funds into a self directed ira. And I say that because I've seen a lot of people doing this for nearly two decade educating 70,000 plus people. I can't tell you how many people call me and say, well I want to self direct but I can't do a solo 401k. My CPA told me I don't qualify, so how am I going to move my money into this real estate deal? Well, you don't need a solo 401k, you probably just need a self directed IRA. So that's important to mention. Now let me fast forward to the good stuff because that was the, you know, where some people might not qualify. But by the way, if you don't qualify now, now that you know the rules, you might be able to qualify in the future, you know, devise a plan with your CPA. Here's the good part about the Solo 401K and why I, I love Solo 401Ks. I'm very passionate about it is because you can contribute as long as you meet the requirements, you can contribute substantially larger dollar amounts to a solo 401k compared to an IRA. So we're in 2024 right now. So IRAs, you can contribute $7,000 when you're under 50 and then when you're 15 over, you can contribute $8,000. That's just how much money you take out of pocket and contribute your growth earnings rollovers in, that's really unlimited. But how much money you take out of pocket, you're only limited by 7 or 8,000. So if you have $1 million in mattress money or gold buried in your backyard, you can't just put that into your ira, right? It's, you got these contribution limits. I know it's annoying, but those are the rules. The Solo 401k, however, you can contribute a lot more money. In fact, in 2024 when you're under the age of 50, if all of your cards are being played right, you can actually get upwards of $69,000 into the Solo 401K. And when you're 50 and over, that amount is 76, 5, $76,500. Now there's an employee and an employer match, but ultimately you can get a lot more money in. Now the very last part of this that's, that's super powerful is that all of that money can be in a Roth component. Think of it just like a Roth ira. You don't get any deductions, it's all going to be after tax money. But if you're playing all your cards right, there's actually a way to get that all into a Roth bucket. So imagine somebody that's 50 or over and they have a lot of income, they're a consultant or a real estate agent and they get 76.5 over the course of, let's just say even five years into that Roth bucket. And then they go out and through their acumen and their expertise, they invest that money wisely. And now you got all that tax free growth and there are no income restrictions on getting that money into the Roth like there is a Roth ira. So you don't have to worry about those modified adjusted gross income limits, those magi limits that I mentioned before. So solo 401k, super powerful. There are some rules and guidelines that people need to think through. But if they're in the position to be able to take advantage of that, there's some interesting elements there for them to consider.
Love that foreign.
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