FEATURE
Self-Directed Solo 401(k) Retirement Plans:
The Underutilized Efficiency-Maximizer
The little-known Self-Directed Solo 401(k) could create a tax-deferral and investment diversification winning combination
By Whitney Nash, CPFA
H
ow can I save money on my taxes?” CPAs are frequently asked this question and are expected to share ideas and options on how to maximize deductions, lower taxable income, and reduce and/ or defer tax liabilities. Suggesting the adoption of a retirement plan to their business-owner clients is often a viable recommendation. The plan that is recommended, however, makes a big difference. When it comes to clients who have income from selfemployment as 1099 independent contractors, or business owners with no W-2 employees working more than 1,000 hours per year, this is especially true.
26 Texas Society of CPAs
It is common for CPAs to recommend SEP IRAs or Solo 401(k)s to this type of client, among a few other less popular options. Both offer high contribution limits and other beneficial provisions, but they are still lacking in one way or another. The SEP IRA does not permit loans to be taken out or elective salary deferral contributions, so Roth and catch-up contributions cannot be made. The Solo 401(k) offers loan and salary deferral options, but it does not allow the client/account holder to be the trustee and self-direct funds to be invested in alternative assets, such as real estate, certain businesses, hard money lending, etc. (See Figure 1 for a side-by-side comparison chart.)
With the growing popularity of portfolio diversification into alternative asset classes, real estate in particular, the Self-Directed Solo 401(k) might be a welcome alternative. CPAs who gain an understanding of this underutilized strategy could position themselves as a great resource to help their clients who meet the eligibility requirements, the pool of which is growing.
Eligibility Requirements to Adopt a Self-Directed Solo 401(k) Plan To determine if someone qualifies for a Self-Directed Solo 401(k), two criteria must be met. First, they
