As a tax attorney and someone who has been in the Self-Directed retirement business for over 13 years, the most common question I have received from new clients fall along the following themes:

What is the right self-directed retirement plan for me?

The question seems very straightforward, but it is quite multifaceted and brings into account various issues and tax matters.  So finally, I decided to write an article that will once and for all answer the question: “what is the right self-directed retirement plan for me?”  The article will be formulated as a simple questionnaire to better explain the reasons for each question.

1. Are you self-employed?

If Yes: Consider going Solo
If No: Skip to Question 2

Solo 401(k)

The Self-Directed Solo 401(k) plan is the best retirement plan for the self-employed.  A Solo 401(k) is simply a 401(k) plan that was created especially for the sole proprietorship or small business owner with no full-time employees.  Hence, if one does not have any earned income from a business one would not be able to establish a Solo 401(k) plan.  However, for individuals that have a side business, the Solo 401(k) plan could be a great way to save for retirement if one does  not have access to an employer 401(k) plan. 

Under the 2022 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $20,500. That amount can be made in pretax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $60,500.

For plan participants who are at least age 50, an individual can make a maximum employee deferral contribution in the amount of $27,000. That amount can be made in pretax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $67,000.

In addition, a Solo 401(k) offers a $50,000 loan feature, plus the ability to self-direct the plan assets into alternative assets, such as real estate and precious metals.

In sum, if you are self-employed or have a side business with no full-time employees (over 1000 hours annually) other than a business owner or a spouse, then the Solo 401(k) plan will provide all the same investment options of a Self-Directed IRA, but with additional retirement benefits, such as high annual contributions limits and the loan feature.

2. Will your IRA investment involve a high frequency of transactions or a high level of involvement on the part of the IRA owner?

If No: Consider the Self-Directed IRA with custodian control
If Yes: The Self-Directed IRA LLC, also known as the checkbook IRA, is your solution

Custodian Controlled Self-Directed IRA

A custodian controlled Self-Directed IRA offers an IRA investor more investment options than a financial institution Self-Directed IRA. With a custodian controlled Self-Directed IRA, a special IRA custodian, such as IRA Financial Trust, will serve as the custodian of the IRA.

Unlike a typical financial institution, most IRA custodians generate fees simply by opening and maintaining IRA accounts and do not offer any financial investment products or platforms. With a custodian controlled Self-Directed IRA, the IRA funds are generally held with the IRA custodian and at the IRA holder’s sole direction, the IRA custodian will then invest the IRA funds into alternative asset investments, such as real estate.

If you are looking to invest your IRA into an alternative asset investment that is not expected to involve a high number of transactions, then the custodian controlled Self-Directed IRA is your best option.  The following are the most popular investments for a Self-Directed IRA investor:

1. Private placements
2. Investment funds
3. Real estate funds
4. Private business investments
5. Debt funds
6. Raw land
7. Cryptocurrency

The Self-Directed IRA LLC

The Self-Directed IRA LLC with “checkbook control” has quickly become the most popular vehicle for investors looking to make alternative assets investments, such as rental real estate that require a high volume of transactions. Under the Checkbook IRA set-up, a limited liability company (“LLC”) is established which is funded and owned by the IRA and managed by the IRA owner.

The Checkbook IRA LLC structure allows the investor to act quickly when the right investment opportunity presents itself cost effectively and without delay. The Checkbook IRA LLC also offers a greater degree of privacy than the Custodian-Controlled IRA since the IRA investment is made in the name of the LLC versus that of the IRA.

In addition, using an LLC owned by the IRA provides limited liability protection to the IRA owner on all IRA assets owned outside of the LLC. The following are the most popular investments for a Self-Directed IRA LLC investor:

1. Rental real estate
2. Investment fund investments involving fund personnel
3. Private business investments involving business management
4. International real estate
5. Investments requiring an entity, such as real estate investment using a loan
6. Cold wallet cryptocurrency investments
7. Defi digital asset investments

Read More: The Beginner’s Guide to Alternative Investments

Conclusion

Choosing the right self-directed retirement solution can have a significant investment and tax implication for the IRA owner.  The Solo 401(k) plan is probably the best self-directed retirement solution available, if you are eligible.  Otherwise, the determination of whether to choose the Self-directed IRA or the Self-Directed IRA LLC essentially comes down to how involved you will be in the IRA investment and how important limited liability protection and privacy are to you.