Finally, a marriage of two of the most popular plans

January 3, 2006 was the first day that an individual saver and investor could legally make a contribution to the new Solo Roth 401(k) that was enacted by the Economic Growth and Tax Relief Act of 2001. Sounds pretty dry, doesn't it? Guess again.

The Solo Roth 401(k) beats the Roth IRA five times over. Unlike the previous standard for phenomenal opportunity for retirement savings (the Roth IRA), the new Solo Roth 401(k) will allow an individual or married couple who own their own business, to sock away up to $109,000 per year for retirement. Of this amount, $44,000 can be composed of after-tax Roth elective contributions (provided the individual, and their spouse, if applicable) are both over 50. So now, for the first time in history, a retirement saver can put up to $22,000 annually into a retirement plan that can grow tax-free for their lifetime!

But it gets better!

Not only is this amount five times greater than what can still be put into a Roth IRA ($5,000 limit, plus a $1,000 catch up if older than 50), but there is no cap on the amount of income an individual can earn before he or she become ineligible to contribute. So, while one is restricted from contributing to a Roth IRA when he or she earns more than $101,000 ($159,000, if married filing jointly), no such restriction exists for the elective Solo Roth contributions!

Are we getting your attention now?

But it gets even better!! With the Solo Roth 401(k), you can invest in two types of investments ("S" corporation stock and life insurance) that are restricted for Roth or traditional IRAs. Furthermore, unlike what you cannot do with your IRA, you can personally borrow up to $50,000 or 50% (whichever ever is less) from your Solo Roth 401(k).

Have you had enough? Or do you want to have "your cake and eat it too?" Well, the home run in the bottom of the ninth with two outs, is this: When you invest in real estate (with a few obscure caveats), and use leverage (e.g., a non-recourse loan from a bank in the form of a mortgage on the property) using a Solo 401(k) or Solo Roth 401k, you are not subject to tax on the income or capital gains produced by the portion of the investment that is debt financed.

With traditional IRAs and Roth IRAs any income or capital gains on debt-financed property is taxed at the trust tax rate (generally 35%) to the extent that debt supports the generation of the income. This is a very important benefit to real estate investors who are in the position to be eligible to form a Solo-401(k). Unlike investing outside of a retirement plan, where taxes apply to net income and any gains generated by debt financing, unless they are sheltered through a 1031 exchange, 401(k) plans are exempt.

The secondary benefit is the avoidance of having to go through the 1031 process and its expense. So, for example, you could literally buy a house in the morning with $100 down and flip the purchase contract in the afternoon, without paying any tax on the gains. The gains would be tax-deferred thereafter, if they had been funded by the tax deferred components of the Solo 401(k), or tax-free if funded by the elective Roth component.

Many of you who have been successful with IRA real estate investments should certainly appreciate the value of this attribute of the Solo plans. Of course, you can also invest your existing Roth and traditional IRAs, including SEP IRAs, right along with your new Solo 401(k) into the same or multiple properties.

In summary...

The new PENSCO Trust Solo 401(k) plan will allow our clients to experience all of the benefits described above.