Paul Ferraresi

Everyone should have a sideline business. It should be started while you are working, not after you lose your job or quit.

A full time business start up usually takes 5 years to reach breakeven. Obviously, starting a side business part time may take longer than 5 years to get into the black.

Why should you set up a side business? It provides a safety net for you and your family. It can provide additional monies to fund your retirement. Finally, it can provide an avenue of exit if you “hate” your J.O.B.

There are numerous tax benefits in owning your own business. One major benefit is to set up your own small business 401K plan.

Small-business 401(k) plans might provide the opportunity you need. These plans are also known as Solo 401(k), Solo(k), and Individual K. These investment vehicles are mostly used by small-business owners and entrepreneurs. Small-business 401(k) plans are perfectly designed to accommodate rollovers from employer-managed 401(k) plans, and they can be opened with the intent of funding them solely with future annual contributions (though that is rarely done).

The advantages of a small-business 401(k) are significant. They offer greater control of funds than does an employer-managed 401(k) or a SEP-IRA. They offer higher contribution limits than Roth accounts ($15,500 plus $5,000 for age 50 and over). And they are easy to manage and administer.

These plans offer you a broader range of investments to choose from instead of the limited number of options found in traditional plans.

Here is a general overview of the most widely used categories.

Alternative Investments in a Small-Business 401(k)

Small-business 401(k) plans can invest in the following assets, though the most common investments are real estate-related. Investments can include income-producing assets through the use of non-recourse loans. Unlike a self-directed IRA, a small-business 401(K) is not subject to Unrelated Debt Financed Income Tax on income-producing property.

• Start a business or buy a franchise
• Buy part of a business
• Buy a partnership interest or form limited partnerships
• Fund limited liability companies or corporations
• Purchase startup company stock or member shares
• Private placements (private company stock investment or loans)
• Private party mortgages and notes backed by real estate
• Purchase residential rental properties, multi-unit buildings, commercial property, storage facilities, boat slips, marinas, and parking spaces
• Bare land parcels, lots, acreage, timberland, RV parks, mobile home parks, and other income-producing land
• Tenants in common for real estate investments
• Tax lien certificates
• Tax deeds
• Lease options
• Royalty rights
• Franchise rights
• Commodities and futures
• Commercial paper
• Equipment leases
• Joint ventures
• Stocks, bonds, mutual funds, CDs
• Prohibited: Collectibles