| Self-employed?
Consider a solo 401(k) | | |
| Even if you already put the maximum
allowable into your employer-sponsored retirement plan (a smart move, particularly
if your employer matches your contributions), you can still set up a solo 401(k)
and shelter a chunk of your sideline income. Under this scenario, you're allowed
the company contribution of your self-employment money, up to 20 percent or 25
percent if your business is incorporated.
Hatching real estate nest eggs
The benefits don't end with the dollars that you can keep out of Internal Revenue
Service hands. The same tax act that created individual 401(k)s also expanded
the types of investments into which people can put this retirement money. Real
estate is one of the most popular alternatives for solo 401(k)s. Virtually any
kind of real estate investment is fair game: condos, single family rentals, mobile
homes, raw land and second mortgages are all possibilities. The
biggest caveat is that neither you nor any of your immediate family -- children,
parents or spouses (siblings are absent from this list) -- can live in the property.
It must be treated as a business investment, all expenses have to come out of
the 401(k) funds and all profits must go back into it. In
order for this to work, you have to have enough money available in the 401(k).
Your annual contributions alone may not be enough, but to accumulate the requisite
investment cash you also can combine other retirement accounts into your individual
401(k); this includes money from 401(k)s you had with former employers, other
IRAs and Keoghs. Your solo 401(k) also
can borrow money, but you may have trouble finding a lender willing to make this
kind of transaction because the law says that the 401(k) -- not you -- is the
borrower. That prevents the bank from getting any kind of personal guarantee of
payment. If you put your plan into real estate, it's important
to ensure that there will be sufficient cash flow, says Debra Greenstein, president
and CEO of Entrust Administration, a company that manages these kinds of plans.
"People sometimes forget that beside insurance and taxes, you have to worry
about fixing the boiler when it breaks or losing a tenant and going vacant for
a couple of months." But in this day of small returns
on stocks and bonds and historic returns on real estate, such an investment can
be very profitable. And if set up and managed properly, it can allow you to buy
a retirement home, profit from it as an investment and then take it as a distribution
when you actually retire and want to live in it. You will
have to pay taxes on the gain, but the 401(k) is entitled to the same expense
deductions available to any other owner, and Greenstein says careful management
can mitigate the tax bite. | 
