Solo 401K

What it is

A solo 401k is a retirement account designed for self-employed people and small business owners with no full-time employees other than the owner (and a spouse). It works like a regular 401k in concept — you set money aside pre-tax, it grows, you pay taxes when you take it out in retirement — but the contribution limits are higher than a standard IRA and the setup lives inside your operating company.

I bring it up in the context of the holdco/opco structure. The operating company — the construction company, the brokerage, whatever — is where the active income lands. That’s also where you can set up the solo 401k. You stash money there, reduce what shows as taxable income, and avoid some of the self-employment tax that would otherwise hit at 15%.

Why it matters

Flippers get screwed on taxes. You make $60,000 on a flip, you might be paying half of that or better to the IRS. The solo 401k is one of the legitimate ways to chip away at that.

Here’s a real example: my wife’s brokerage company has a solo 401k set up. When her company earns the 3% commission on a sale — $9,000 on a $300,000 house — a chunk of that goes into the solo 401k. She’s a one-person business. You get to stash a lot of cash in there and not have to pay taxes on it. Great deal.

That’s the strategy at work. It’s not that I’m avoiding taxes on the flip itself. It’s that by structuring things through operating companies that each have access to tax vehicles like the solo 401k, I shift the effective rate on a large portion of the income. Instead of paying $45,000 in taxes on $90,000 of total profit across a deal, I’m paying closer to $30,000. You see how taxes are a huge part of the game. It’s not just offense, it’s about the defense.

The other play he mentions is the S-corp election. If your operating company is taxed as an S-corp, you can mitigate the 15% self-employment tax by taking a reasonable salary and the rest as distributions. That’s separate from the solo 401k but often used alongside it. Not a CPA — talk to yours.

How it shows up

The solo 401k shows up inside the opco, not the holdco. The holdco holds property. The opco does the work — construction, brokerage, wholesaling — and gets paid by the holdco. The opco is where active income flows, and that’s where the solo 401k lives.

If you’re a solo operator who’s been running everything in one entity or paying yourself as a W-2, this is the structure that opens those doors. You get your operation company. You take a profit in that company. Now I’m able to do things like set up an IRA, set up a solo 401k, regular expenses — Ross’s list from the video includes going out to eat for lunch with someone you’re doing business with, gas, the truck, the camera filming the video. All of that reduces taxable income in the opco before the solo 401k contribution even happens.

The defined benefit plan is a separate, higher-ceiling vehicle that some operators use once income gets large enough that the solo 401k limits aren’t enough. I run both — the defined benefit on top of the solo 401k.

Related

holdco opco, capital gains, depreciation, defined benefit, wealth engines, self employment tax