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Best Retirement Strategy: IRA or Solo 401(k)?

best retirement strategy
3 Minute Read

At some point in everyone’s life, they contemplate the issue of choosing the best retirement plan. There are millions of IRAs currently established, making it the most popular retirement plan. However, that does not mean an individual retirement account is right for you. An IRA, governed by the rules pursuant to IRC 408, is the most common retirement strategy simply because it is available to anyone who earns income subject to self-employment tax. In other words, anyone who earns self-employment income may contribute to an IRA even though they may work for an employer who offers a 401(k) qualified plan.

Best Retirement Strategy for the Self-Employed

The determination of whether you can enhance your retirement savings with a Solo 401(k) rather than an IRA depends on whether you are self-employed and have a business. There are a number of significant advantages of establishing a Solo 401(k) over an IRA. But it’s important to note that this retirement solution is only available to those who have a business with no full-time employees and self-employed individuals.

If you are not self-employed, you may have the ability to contribute to an employer 401(k) qualified plan or SIMPLE IRA plan, if such a plan exists. Alternatively, if you are not self-employed, you can always make regular IRA or Roth IRA contributions each year.

Six Advantages of the Solo 401(k)

Higher Contributions

The first major advantage of a 401(k) or Solo 401(k) plan over an IRA is in the area of annual contributions. While an IRA only allows a $6,000 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), a plan participant of a 401(k) or Solo 401(k) Plan can make annual contributions up to $56,000 annually with an additional $6,000 catch up contribution for those over age 50. If you want to the ability to save more faster, the Solo 401(k) may be the better retirement strategy.

Borrow Money from Your Solo 401(k)

A second advantage of a 401(k) or Solo 401(k) plan over an IRA is the ability to borrow retirement funds tax and penalty free. While an IRA offers no participant loan feature, the Solo 401(k) Plan allows plan participants to borrow up to $50,000 or 50% of their account value (whichever is less) to be used for any purpose. With your Solo 401(k) loan, you can pay credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate).

Open Your Plan at A Local Bank

Unlike an IRA, Roth IRA or Self Directed IRA, with a Solo 401(k) Plan, you can open the 401(k) bank account can at any local bank or credit union. This benefit allows the Plan Participant (you) to serve in the trustee role. This means that all assets of the 401(k) trust are under the sole authority of the Solo 401(k) participant. A Solo 401(k) plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.

Discretionary Contribution Options

Like an IRA or Roth IRA, contributions to a 401(k) or Solo 401(k) plan are completely discretionary. You always have the option to contribute as much as legally possible, but you also have the option of reducing or even suspending plan contributions if necessary. Additionally, in the case of a Roth IRA or a Self Directed Roth IRA, those who earn high incomes are disallowed from contributing to a Roth IRA or, in most years, converting their IRA to a Roth IRA.

The Solo 401(k) plan contains a built in Roth sub-account which can be contributed to without any income restrictions. If you cannot establish a Roth IRA due to your high earning, the Solo 401(k) plan may be the best retirement strategy if you meet its eligibility requirements.

Easy to Administer

Moreover, like an IRA or Roth IRA, a Solo 401(k) or Individual 401(k) plan is easy to administer. There is generally no annual filing requirement unless your solo 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

Unrelated Debt Financed Income

Finally, if you want to purchase real estate with your retirement funds, using a 401(k) or Solo 401(k) Plan will allow you to borrow non-recourse funds for the real estate acquisition and not be subject to any Unrelated Debt Financed Income (UDFI) or Unrelated Business Taxable Income (UBTI or UBIT).

Get in Touch

To learn more about the Solo 401(k) retirement solution, please contact IRA Financial Group directly at 800-472-0646. You can also fill out the contact form on this page to speak with a certified 401(k) specialist.

We’re happy to help you.

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