SOLO 401K: A TAX SAVING STRATEGY FOR REAL ESTATE INVESTORS DMITRIY FOMICHENKO
from his real estate business in
2015. Bob contributes $6,500
in
his
companysponsored
retirement plan, which cuts his
salary deferral contribution in
the Solo 401k plan to $17,500
in 2015, making net salary
deferral
contributions
of
$24,000. As a single member
LLC, Bob can further contribute
up to 20% of his business
income or $12,000 in 2015,
allowing him to cut his taxable
Salary deferral contribution: Under the salary
income by $36,000.
deferral contribution, you can put up to $18,000 in
2016along with a catchup contribution of $6,000 for
Find out your annual contributions with our
professionals above the age of 50.
contribution calculator.
Profitsharing contribution: The profit sharing
Purchase Rental Property with Solo 401 k plan
& Defer Taxes on Rental Income
contribution allows you to contribute 20to 25% of
your business income, with maximum cumulative
contributions
of
$53,000
or
$59,000,
for
professionals above 50 years, in 2016.
If you already have a selfdirected Solo 401 k plan,
start purchasing rental property within your
retirement account. The IRS allows investing in real
Case I: Melinda,41 years old and a real estate
estate through a Solo 401 k retirement plan, which
investor operating as a corporation, had a net
means you have the option to defer taxes on your
income of $180,000 in 2015. She could contribute up
rental income until distributions.
to $18,000 under salary deferral contributions along
with profitsharing contributions of $35,000, cutting
You will have to purchase the property through your
her taxable income by $53,000 in 2015. It is
Solo 401 k plan, and if there are insufficient funds in
important to consider that although 25% of her
your account, you can use nonrecourse financing to
business income is$45,000, Melinda can only
fund the transaction. Unlike IRA plans, the use of
contribute up to $35,000, as the maximum
nonrecourse financing through a Solo 401 k plan
contribution limit comes into play.
does not trigger any additional tax. Make sure that
the maintenance cost of the property goes through
Case II: Bob, 53 years, operates as a parttime real
your retirement account only, and the rental income
estate professional, generating an income of $60,000
comes directly into the plan as well.