What is the Solo 401(k)?

More and more investors are turning to a little-known investment vehicle called the solo 401(k) to help them build and preserve their wealth. The reason more investors are turning to this little-known investment vehicle is because it allows an individual to invest in virtually anything including, but not limited to, foreign currencies, annuities, private businesses, real estate, mortgage notes, precious metals, stocks, mutual funds and/or tax liens. This means investors don't have to invest their 401(k)s and IRAs solely in securities, and thereby decrease their dependency on the untrustworthy and greedy Wall Street system.

While the Solo 401(k) is a popular way to save and invest for retirement, a little education about the retirement savings account is a must.

Where Did the Solo 401(k) Come From?

Upon the passing of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, investors learned that the 401(k) could be used by self-employed persons who have no full-time employees. When used as a tool for the self-employed, EGTRRA stated that the Solo 401(k) would offer reduced administrative requirements and that the 401(k) participant could make contributions as both the employee and employer, allowing for very high contribution limits.

To be eligible for the Solo 401(k), EGTRRA stated that an investor must have the presence of self-employment activity and have no full-time employees. Self-employment activity could be on a part-time basis and ancillary to full-time employment elsewhere. The business must intend to generate revenue for profit and make significant contributions to the plan.

What Are the Benefits of the Solo 401(k)?

Understanding the background of the Solo 401(k) is only half the education. Here are some of the unique benefits of the Solo 401(k) and why more investors are turning to this retirement savings account:

• Contribution Limits Nearly 10 Times Higher than an IRA: The Solo 401(k) annual contribution limit is $49,000 (in 2009) with an additional $5,500 catch-up contribution for those over age 50. If the business owner's spouse is involved in and compensated by the business, he or she also can make up to $49,000 in annual contributions. On the other hand, IRA contribution limits an investor to a $5,000 contribution per year and only a $1,000 catch-up contribution for those over the age of 50.

• Exemption from UDFI/UBTI tax: Because many investors utilize the Solo 401(k) to purchase real estate, they are often pleased to find out that Solo 401(k) is exempt from certain UDFI, or Unrelated Debt Financed Income(a type of Unrelated Business Taxable Income). On the other hand, when an IRA buys real estate that is leveraged with mortgage financing, it creates UDFI on which taxes must be paid.

• Participant Loan Feature: Unlike the IRA, the Solo 401(k) enables participants to borrow up to $50,000 or 50 percent of their account value (whichever is less) for any purpose. Some investors consider this loan feature a way to give themselves their own personal bailout.

• No Income Restrictions: Roth IRAs disqualify those earning high incomes from making contributions; however, the Solo 401(k) can have a built-in Roth sub-account that an investor can contribute to regardless of his or her income.

• No Custodian Required: Perhaps the most substantial benefit of the Solo 401(k) is that it does not require the participant to hire a bank or trust company to serve as trustee. This flexibility allows the participant to serve in the trustee role. This means that all assets of the 401(k) trust are under the sole authority of the participant. Any transaction that the 401(k) trust enters into is entered into by the trustee, simplifying the process and eliminating costs and delays presented by IRA custodians and/or LLC formations that IRAs face. Furthermore, physical possession of and discretion over the plan's assets is paramount to investors concerned with the uncertainty of the economic future of the nation's financial services industry and government.

As more individuals look to invest their retirement savings outside of Wall Street and into safer assets like annuities, real estate, gold and private companies, more self-employed investors will be praising the one gift from the government that allows them freedom to invest: The Solo 401(k).