Ask the Self-Directed IRA and Solo 401k Experts

If I am self-employed, is there any reason I would not want to adopt a solo 401(k) Plan vs. a self-directed IRA LLC?

Tracy I., VA

Hi Tracy,

If you are self-employed or a small business owner with no full-time employees other than the owners, the Solo 401K Plan offers the same benefits of a self directed IRA LLC plus many more tax and retirement advantages.

Both the Self Directed IRA LLC with checkbook control and the Solo 401K Plan offer a number of advantages, including the ability to have control over your retirement funds so one can make traditional as well as non-traditional investments, such as real estate, tax-free and without custodian consent. However, with a Solo 401K Plan, a self-employed individual can also make high contributions, borrow up to $50,000 or 50% of the account value tax-free and penalty-free, eliminate the fees of a custodian, make Roth (after-tax) contributions, and use nonrecourse leverage tax-free.

In order to be eligible for a Solo 401K Plan, the individual must operate a business with no employees other than the owner(s). The business is not required to be profitable but there must be an active business with the anticipation of profit. Also, the individual can be employed by another business and still adopt a Solo 401K Plan though a side business. Thus, if the individual does not have a business or has a business with employees, he or she will not be eligible for the Solo 401K Plan. Thus, that individual will be required to use a Self Directed IRA LLC to make investments using retirement funds.

In general, if an individual is self-employed or has a small business with no employees and does not need to use his or her Roth IRA funds for an investment, using a Solo 401K Plan over a Self Directed IRA LLC as a retirement and investment vehicle usually is the right choice.

By adopting a Solo 401K Plan, one would be able to make high contributions ($55,000 versus $5,500), borrow up to $50,000 or 50% of your account value tax-free, use nonrecourse financing tax-free, make after-tax Roth contributions up to $18,500 or $24,500 if over the age of 50, in addition to having checkbook control just like a Self Directed IRA LLC. In other words, if you are self-employed and don’t need to use Roth IRA funds for an investment, selecting the Solo 401K over a Self Directed IRA is probably the right choice as you will experience all the same benefits of a self directed IRA LLC, plus many more.

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