How Self-Employed Investors Can Borrow From a Solo 401(k) Tax-Free

Ross Powell (00:00)
Only between two and three percent of the population knows anything about it. And so it’s started in two thousand and two under the George Bush administration, and it’s been around for what, twenty-four years now? But only two or three percent. But again, if you— if you look at who controls the money in this country, if you’re— if you’re a financial advisor, if you’re a broker or whatever, financial— you know, you don’t want anybody mount— you want to make— you make your money by managing other people’s money. So if I move people’s money out of the main what I call the matrix in Wall Street and let them have some money in— in real estate or private equity, private loans, tax liens, that’s another thing real estate people can really get into on.

Dylan Silver (02:08)
Hey folks, welcome back to the show. Today we’re joined by Ross Powell, the founder of Survival 401k, where he helps entrepreneurs, real estate investors, and 1099 professionals unlock retirement capital through self-directed solo 401k plans. Ross, thanks for taking the time today.

Ross Powell (02:26)
Thank you, sir. It’s great being with you. Thanks, Dylan.

Dylan Silver (02:29)
Now, when we talk about retirement for self-employed folks, I’m sure you see lots of mistakes happening all the time, but what is the biggest mistakes that you see self-employed people commonly making?

Ross Powell (02:42)
Well, most of them lock themselves into an IRA or— or a self-employed IRA, a SEP IRA. And those come with large constraints. So, excuse me. So they— they don’t— they don’t allow you to have access to your money. There’s a custodian in between you and— and your money. And so— but the solo 401k, we are more aligned with: you control it. There’s checkbook control. You are in control. So that’s the big difference. Somebody else on the IRA side is— they’re controlling it; on this other, you’re controlling it. So it depends on who you want to control your money. And so that’s the major difference. And the— the amount of money you can put away is significantly different.

Dylan Silver (03:19)
Talk about that, right? So there’s limits when you have an IRA to my knowledge. On a 401k, are there limits?

Ross Powell (03:26)
Sure, I— and every plan, IRS sets limits, right? So in a basic IRA, you have like a limit of eight thousand that changes by the year. A SEP IRA is higher. It’s similar in numbers to the 401k, but again, it’s locked up with a custodian. You don’t have the loan function. But on a— an average person under 50 years old on this— on the 401k can put away up to $72,000 a year. If you’re over 50, they add another 8,000 to 80. And then between 63 and 65, I believe that’s the number now, you can add another four or five thousand. So you can actually get up to like eighty-four thousand. So it’s— it’s a huge boon for you. So if you have an up year as a real estate agent and you’re— and you’re— you’re ringing the bell on your commissions that one year, then you can put away a lot of it and shield it from taxes, right? So then in your down year, you can access that money through loan functions or distributions, whatever, if you’re having a lean year. It gives you a lot of flexibility. And you control the purse. Your money sits in a— in a business checking account at your local bank.

Dylan Silver (04:21)
You mentioned loan function and we had talked about this briefly in the green room. I was not familiar that you could take out a— a loan against a 401k without incurring a penalty. Are most folks aware of that or is this something that they’re surprised by as well?

Ross Powell (04:36)
Well, the— the— the thing about the whole product itself, the solo 401k, only between two and three percent of the population knows anything about it. And so it’s started in two thousand and two under the George Bush administration, and it’s been around for what, twenty-four years now? But only two or three percent. But again, if you— if you look at who controls the money in this country, if you’re— if you’re a financial advisor, if you’re a broker or whatever, financial— you know, you don’t want anybody mount— you want to make— you make your money by managing other people’s money. So if I move people’s money out of the main what I call the matrix in Wall Street and let them have some money in— in real estate or private equity, private loans, tax liens— that’s another thing real estate people can really get into on— you can actually make a lot of money. So, but with the function— with the— the loan, it’s fifty percent of your balance or fifty thousand dollars maximum. So that could be a five-year note for just a general thing, like you’re gonna use something for real estate. You need a bridge loan for a real estate transaction. Or if it’s your primary dwelling, your homestead, it could be between 15 and 30 years. And that lock yourself in at prime plus two, or whatever the current prime— the current CD rates are plus a couple of points. So generally right now you’re looking at between five and six, six and a half percent. Cheap money, and that’s the quickest and easiest credit pull you’ll ever do because you’re writing yourself the check. You’re approving yourself in the— in the credit profile. So it can be used as a line of credit as well for yourself.

Dylan Silver (06:47)
I’ve had a lot of folks on the show who are in the life insurance space. It’s separate from what we’re talking about here, but I’d like to get your perspective. This infinite banking concept associated with life insurance, what’s your, you know, personal feedback on that versus a solo 401k?

Ross Powell (07:03)
Well, I— they each have their— their niche, right? So the “bank on yourself,” I think is what you’re talking about, or something similar to that, where you’re on a whole life policy and you’re building cash value and you can take loans from yourself or you can take distributions because you paid the money in and you can take the money out tax-free. The solo 401k has a similar because you can put— you know, you roll your money into that. So you have legacy plans all over the country. Let’s say your— your second career’s real estate and you get— got let go from say Exxon, and you roll over three hundred thousand from Exxon, right? So you roll that three hundred thousand into the 401k, and that money’s sitting there to— to invest in whatever you want. Could be— it could be Wall Street or it could be Main Street. You’re getting into— you’re investing in all of these different types of rental properties. And that’s the benefit of the 401k, is that you don’t— you’re not subject to the UBTI, the unrelated business taxable income. So, income tax. So essentially, if you’re an IRA or SEP IRA, you’re going to pay this 35% unforgivable tax if you’re doing any kind of business. And if you also have— you have UDFI, which is the unrelated debt-financed income. So that’s again another tax you have to pay. So with the— the IRAs, you have to pay those taxes. And if you use non-recourse lending… so you can get a loan, let’s say you have $300,000 in your 401k and you want to buy this $500,000 property, you put 40% down and then you finance the rest, and then the mortgage is paid by your renter, or if it’s like a strip mall or whatever you’re doing, your rental income pays your mortgage, but you don’t pay any income tax on that— on that loan. Whereas the IRA, you would do that. So it’s significant difference between an IRA, SEP IRA, and a 401k.

Dylan Silver (08:38)
I’m listening to this and I’m thinking, well, what would be the— the benefit of ever getting an IRA if I have access to a product like this? Is there a— a situation where an IRA does make sense?

Ross Powell (08:49)
Well, if you— if you, again, for small investors and people that have small amounts of money, again, small businesses that are just— have side gigs that don’t generate a lot of income. I mean, we generally have like a fifteen thousand to twenty thousand rollover minimum because it— it’s cheaper to pay the taxes on it than to get one of our plans. And again, I— I don’t— I try to be moral with people and don’t want to sell them something that they don’t need, right? So well, there’s others will take their money, but I’m not— morally, I’m not gonna do that. Right. So at the end of the day, you know, you can do an IRA and— and you can set them up for your children as they get young— and when they’re young and put money into their account for them, and then that actually helps them for their college or whatever they want to get into, trade school or whatever. So, but generally speaking, anybody that’s making over, you know, twelve, twenty, twenty thousand dollars… I mean a lot of first responders, firemen, police officers, doctors— I had local tenants, doctors, that use this because again they get beaten to death in taxes. So you can have your primary job and let’s say your— your side gig gets to be where it’s really busy and you quit your main job. That’s how I got into this business in the first place. I just did this as a side gig 12 years ago, and it got to be so busy because nobody’d ever heard of it, and I got in on podcasts back in the day and I got to be so— I couldn’t do my day job. I was a vice president of a very big bank. And I got to where I couldn’t do my day job, so I had to quit. And then suddenly after, it’s just exploded, and now we’re at 12 years. So it just— again, if you have your side gig and you start making some real money, that side money is on your 1040 is going to push you into another bracket. So if you can push all that side gig money into a 401k plan, then you can use it for loan facilities or invest in what you want. It makes a huge difference to your, you know, your long-term net worth.

Dylan Silver (11:03)
Pivoting here, you mentioned also in— in the green room that you are getting into funding for— for real estate deals. What does that look like? ‘Cause this is a separate segment entirely from retirement planning, right?

Ross Powell (11:14)
Right, right. So we’ve— I’m— I’m— I’ve been talking to a small business. I’m part of a group called Unite SA and it’s in San Antonio, but they’re just a small group of people that— well, four hundred’s not small, but four hundred members and it’s growing and it’s gonna be rolling up to other states. Where you just have people that are have like-minded and general feel belief systems and say they try to do work inside with each other, try do business with each other. And I was talking to the leader of that and I said, “You know, we know we have funding for small businesses, and it could be for equipment, it could be for real estate, it could be just unsecured credit. It could be for SBA loans. You could— there’s something called ROBS, which is usually your— your 401k to fund a new business.” So again, there’s a real need— there was a real need out there. And so I did some research and I found people that we can work with out of California, and they can actually get people funded for up to five million dollars. It could take twenty-four to forty-eight hours. So again, with all the automation they have and ever the— the— the beast has all their information on you, right? And then across the internet, they have everything they can find on you. So they can do a lot, a lot of work on getting you funded to get your— if you’re starting a new business, you may want to buy a franchise, all those kind of things. And so now we’ve decided to go into that simply because it’s an added service. If somebody needs more than fifty thousand they can do with their 401k, we can roll over and if you need to have a fix and flip and you need a hundred thousand to do that, we can put turn around to the people that can do that for you.

Dylan Silver (12:32)
Now will you also advise folks on structuring, you know, informing their business? ‘Cause some of these are— are related. If someone’s doing a flip but they’re also, you know, retirement planning over here, they’ve— I’ve heard, you know, you want to have an LLC for each project, that type of thing. Will you advise folks there?

Ross Powell (12:48)
I can. I mean, I can guide them. I’m not a fiduciary. I— I’m not a financial planner. I’m, you know, a licensed financial planner. Well, I’m not a real estate agent as well, but I have twelve years of experience and thirty years, forty years of a finance experience in banks and insurance companies. So I also have— we have a litany of people with lawyers, accountants, things like that we can put people into so to actually help them. So if we get into some sticky wicket, I’ll— I’ll bring in an attorney to help them. Or if they need to do something with— to help their accountant understand, we’ll send them over to somebody. But yes, I’ll help them structure your company, set you up with an LLC, get you with an S Corp, or get you with a bookkeeper or an accountant for your S Corp. So you can show— you can reduce your 15.3% self-employment tax that you don’t want to pay. Right. So that that same 15.3% you’d pay to the government, you could put into your 401k plan every time, you know, it makes a huge difference long-term.

Dylan Silver (13:38)
You t— taxes in general are so— so complicated for a lot of folks who are on the on-ramp and scaling as new business owners, especially realtors, right? And oftentimes people don’t think about this until they’ve got a big tax bill to pay. Then they’ll go look for the bookkeeper or the— the CPA who can help them rather than do it themselves. At what point in people’s journey are they reaching out to you? Is it after they’ve already had a large cash windfall, or is it while they’re, you know, on that on-ramp, so to speak?

Ross Powell (14:07)
They come from all different angles, whether there’s people that are leaving, they got laid off, or they finally retiring and they don’t want to leave their money with their company, or they— they’re studying their side gig and they’re realizing they have 10,000 in this company and 15,000 in this company and 26 sitting over here. Then at the end of that, they’ll say, “Well, I can—” if I tell them you can combine all that, you know, you almost have $50,000 to work with. That 10 and that 10 and that 26 doesn’t really do you any good if you’re, you know, by themselves, because you can’t really do much with that. So putting it together, that would be a nice down payment on a rental property, especially at 40%, what then you bring in your non-recourse lending. So that— that’s again, they— if they don’t know, most of this, a lot of times it’s education on what they can do. And I have others saying, “Well, I’m getting my business getting big, I’m— I but I don’t want to have employees.” They have 1099 employees. And that’s the real key for the 401k is it’s— it’s made for basically two-peer— two-person business. So you can have as many 1099 employees as you want, but you c— your W-2s can’t be over a thousand hours in a year. So it’s great for a brokerage house where a real estate broker or— or— or somebody like that, because they can have all their agents are 1099. They may have a secretary or they may have a— somebody that that works a thousand hours, but that still allows them to put a bunch of money away and then also help their people. And— and but before that, we have an affiliate program that helps them, even brokers or other real estate agents— if they bring people to us, they’ll have— that’s another revenue stream that they can generate money by just referring people to us. So there’s a lot of benefit. We have a lot of opportunities for that.

Dylan Silver (16:16)
I’d like to get a little granular on being able to, you know, fund your business. And y— you even mentioned keeping, you know, people on payroll, if I’m not mistaken, 1099, right? And so when you’re doing it in a 401k versus, you know, traditionally other methods that people might be doing this, I’m imagining there’s a big tax savings there. I know tough to say, I’m putting you on spot here, but on some level, what would that look like, or what might that look like for folks who have a few contractors that they’re paying?

Ross Powell (16:45)
Well sure, so the contract, but as long as they’re 1099, you get that 10,000, it doesn’t matter. As long as you’re not— they’re not W-2 employees and you’re paying their taxes for them, it doesn’t matter how many people you have. So the money comes in and they still get a 1099, they get paid— let’s say you get the commission-based, and every— and once a month everybody these— some people get 10,000, some people get 30, somebody gets something else based on their commission, right? So that— that doesn’t matter because it’s not— you’re not W-2, you’re not filing taxes on Social Security, Medicare, and all the FICA stuff. So long as you’re not doing that, you’re not doing their withholding, you’re— you’re golden. Now you might have one person working in the office part-time, thousand hours a— a year or less, then that’s fine. But anything after that, you can’t. You think you’d have to move to a different kind of plan. But for the— for the small, especially real estate agents, it’s perfect.

Dylan Silver (17:32)
Now, I’ve had folks on the show also talk about self-directed IRAs and— and I’ve heard this term self-directed real estate IRAs, but I also understand that you have to have a certain degree of distance, if I’m not mistaken. You can’t be actively managing. And if we compare that product to a 401k where you can take loans out, I mean, it seems to me that the solo 401k is, you know, more utility. You can do more with it, right? Do you have folks who are comparing this product to, you know, a— a— a self-directed IRA?

Ross Powell (18:06)
Absolutely. Every day. I mean, people— I have folks just moving their IRAs into the 401k. So, because you can bring in— the IRS allows you to roll over almost every retirement plan, whether it’s a 403b from a nonprofit, a 457 from a municipality working for a city or a county, your f— your IRAs, your SEP IRAs, your simple IRAs— anything, the only thing you can’t bring over is a Roth IRA because it’s after-tax. Now you can bring a Roth 401k. And you could— that’s another big deal within the 401k plan is you can move your money into what’s called a Roth 401k, then you can do this mega Roth roll— roll-up because my conversion, and then all your money going forward is tax-free. So you pay the tax up front, and then you just— it then everything grows tax-free. You never pay tax again on any of that money. So that— where you don’t have that within the IRA. But— and you have a custodian. IRAs require a custodian, so it could be self-directed custodian or it could be your bank or whoever it might be, but you— the buck stopped with you. You are the fiduciary, you are the plan administrator, and you are the trustee. And if you’re a married couple, that’s, you know, again, you can share those duties. And so it’s— both spouses can participate in double their money, as well as for— so if you have a couple that sells real estate together, it’s lucky day at the races for them.

Dylan Silver (19:22)
I’d be curious to see what lenders say about using a 401k as reserves. Do you know about this? If you know you need six months of reserves to buy a property or an investment property, could you use your 401k as proof of funds?

Ross Powell (19:35)
You could take the loan out and prove that and put that loan in the bank and have that proof of funds. Because you— because normally 401k retirement plans are not attachable. So if something goes south and you can’t— they need their money, they can’t really go and get a charging order against a 401k. So bank— they don’t— they won’t use that— those reserves. They’re like— they see that as your net worth, but they can’t see that as a where they could go after it if— if things go bad.

Dylan Silver (19:40)
Yeah.

Ross Powell (20:04)
But if you put fifty th— if you need that— that reserve and it’s under fifty thousand, or if you’re together a hundred thousand, that’s no problem. Then you could— the money sits there, you let it age, and the bank will see that as your reserves.

Dylan Silver (20:15)
Now you’re doing something pretty unique. You mentioned only one to two percent of the population is even aware of— of this type of product. If folks already have, you know, a bookkeeper and they do some level of tax strategy, can they keep their current team and still incorporate some of these tools that— that you had mentioned? Or do you really also need to be working with, you know, a— a— a bookkeeper and a tax preparer who understands this— these products as well?

Ross Powell (20:41)
We can educate the people that they’re using, right? I can turn them on to another— to another accountant that can find— and it’s the information’s readily available for accountants. And you have two types of accountants. You have one that’s all about compliance and a basic vanilla, and you have one person that says, “I’m gonna try to save you money on taxes.” They’re two different animals. So this person’s transaction-based, where this one is more creative planning-based, right? So it depends on what kind of accountant you have. I have others that don’t want anything to do with it, and others go, “Wow, that’s great. Let me— I’m out,” and they start sending me clients. So it just— again, it’s an education perspective and understand what— what the— the compliance is very easy, right? There’s not a lot of— you have to— but you have to be disciplined. You can’t use this as a honeypot or whatever. It has to be, you know, you have to be very disciplined, and you can’t use— there’s rules about, you know, transactions you can can’t do, who you can transact with, those kind of things that to keep you out of the— out of the judgment zone, I call it. Keep you out of the eyes of the IRS.

Dylan Silver (21:35)
So when folks are taking out these loans, it’s best that they go to their accountant or the— the someone who’s managing their— their account, right? So to understand if this is something that would be compliant or not before they go ahead and do it.

Ross Powell (21:49)
No, no, it— again, this doesn’t require an accountant to manage it for. You can manage it yourself. So I have five hundred and something clients— five hundred and fifty-something clients. The majority of them… but of some that have a lot of money and over a million or two million dollars, they— they have somebody help them with it. But the average Joe or Jane that are sitting on three or four hundred thousand that they rolled over, they manage it themselves. You know, they— they deal with it and then that— there’s some certain rules that have to be applied. So if you have over 250,000 in your plan, the only for— the only reporting you have to do on it, there’s called a 5500-EZ, which is just a simple two-page document that you have to send in by the end of July every year or the prior year. So it’s— it’s not— it’s not hard. I mean, on our website there’s a compliance sec— section that actually interviews you and it actually generates the actual IRS form that you can mail in. So there’s a lot of capability with that. So that we try to automate it and make it as easier for people, or we could consult with them and we help them do it if they don’t understand. We do access pretty much.

Dylan Silver (22:47)
We are coming up on time here, Ross. Any new projects that you’re working on? And then also, anything you’d like to mention directly to our audience.

Ross Powell (22:54)
Sure. I mean we have a sp— again, we have our— our a dedicated real estate page. So it’s survival401k.com/realestate. And that’s a specific page for real estate agents for them to learn, and then they can get a hundred dollars off actually the pre— the price of the plan. So that’s sort of a thing for them. Then— then the week— we’ll call them and get them set up and see what we can do to help them. The big other thing is the funding. It’s funding.survival401k.com is another big project we’re doing now. And so you can— if you just have questions, you can just go to survival401k.com and just click on the “Contact Us” and we’ll respond to you as soon as we can and just talk through and whether it fit— it’s a fit or it’s a— not a good fit. And if it’s not a good fit, but we know somebody it is a good fit for, we’ll help you out. So I— I just look at this as almost like a mission to actually help people. So I started this to help people, and it turns out that it just became my job. So it’s been doing it a long time. And if— if I don’t know, I know somebody that can help you.

Dylan Silver (23:45)
Ross, thank you so much for joining us today. Thanks for your time.