Let AI Pick Your Perfect Self-Directed Solution!

IRA Financial Blog

Solo 401k vs. Self-Directed IRA

Solo 401(k) vs. Self Directed IRA LLC

In terms of choosing the Solo 401k vs. Self-Directed IRA LLC, participants should choose the Solo 401k plan if eligible. The robust features of the Solo 401k plan offer more advantages than the Self-Directed IRA, which we explain in this article.

Key Points
  • If you have self-employment income, the Solo 401k is the far better choice
  • Anyone with earned income can contribute to a Self-Directed IRA
  • The Solo 401(k) offers numerous advantages to the Self-Directed IRA, including higher contribution limits, a loan option, and UBTI exemption

Solo 401k vs. Self-Directed IRA

A Self-Directed IRA and a Solo 401(k) are both retirement accounts that allow you to invest in traditional and alternative investments. Anyone with an income can open a Self-Directed IRA. However, only those who are self-employed can open a Solo 401(k). Aside from eligibility, a Solo 401(k) allows you to take out a loan tax-free! In addition to these benefits, you can contribute more with a Solo 401(k) than a Self-Directed IRA. Some providers only allow Self-Directed IRAs to have a checkbook IRA. However, IRA Financial is one of the few providers that also allows Solo 401(k) holders the ability to have a checkbook IRA.

If eligible, a Solo 401(k) remains the ideal retirement plan for many individuals. If you are self-employed with no full-time employees, keep reading to learn how you can benefit from a Solo 401(k). However, if you do not have self-employment activities, there are some solutions. You can still open a Self-Directed IRA. You can also take a side job in the gig economy to provide you with Self-Employment income.

Read more: 7 Side Gigs Anyone can do to Open a Solo 401(k)

What is a Solo 401k?

A Solo 401k plan is an IRS-approved retirement plan, which is suited for business owners who do not have any employees, other than themselves and their spouse. The “one-participant 401(k) plan” or individual 401(k) Plan is not a new type of plan.

Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no compelling reason for an owner-only business to establish a Solo 401k Plan because the business owner could generally receive the same benefits by adopting a profit-sharing plan or a SEP IRA. After 2002, EGTRRA paved the way for an owner-only business to put more money aside for retirement and to operate a more cost-effective retirement plan than a Traditional IRA or 401(k) Plan.

Read More: What is a Self-Directed IRA LLC?

Several options are specific to Solo 401k plans that make the Solo 401k plan a far more attractive retirement option for a self-employed individual than a Self-Directed IRA for a self-employed individual. However, it is important to note, that you must be eligible for a Solo 401(k). To determine your eligibility, use our free AI-based tool to identify what type of Self-Directed Retirement Plan is right for you!

Solo 401(k) Contributions

2023: Employee Deferrals Under 50: $22,500

2024: Employee Deferral Under 50: $23,000

2023: Employee Deferrals Over 50: $30,000

2024 – Employee Deferrals Over 50: $30,500

2023 Max Aggregate Contribution Amount (Employee Deferrals + Employer Contributions) Under50: $66,000

2024: Max Aggregate Contribution Amount (Employee Deferral + Employer Contributions) Under 50: $69,000

2023 Max Aggregate Contribution Amount Employee Deferrals + Employer Contributions) Over 50: $73,500

2024 Max Aggregate Contribution Amount Employee Deferrals + Employer Contributions) Over 50: $76,500

Benefits of Opening a Solo 401(k) vs. a Self-Directed IRA

1. Reach your Maximum Contribution Amount Quicker

A Solo 401k Plan includes both an employee and profit-sharing contribution option, whereas, a Self-Directed IRA has a much lower annual contribution limit.

Under the 2022 Solo 401k 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 $61,000.

For plan participants age 50 or older, 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 $67.5,000.

Whereas, a Self-Directed IRA allows an individual with earned income during the year to contribute up to $6,000 or $7,000 if the individual is at least age 50.

2. Tax-Free Loan Option

With a Solo 401k Plan you can borrow up to $50,000 or 50% of your account value, depending on which is less. The loan can be used for any purpose. With a Self-Directed IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.

3. Use Non-recourse Leverage and Pay No Tax

With a Solo 401k Plan, you can make a real estate investment using non-recourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax (IRC 514). However, the non-recourse leverage exception found in IRC 514 is only applicable to 401(k) qualified retirement plans and does not apply to IRAs. In other words, using a Self-Directed SEP IRA to make a real estate investment (Self Directed Real Estate IRA) involving non-recourse financing would trigger the UBTI tax.

4. Open the Account at Any Local Bank

With a Solo 401k Plan, the 401(k) bank account can be opened at any local bank or trust company. However, in the case of a Traditional Self-Directed IRA, a special IRA custodian is required to hold the IRA funds. At IRA Financial we offer the ability to open a Solo 401k online.

5. No Need for the Cost of an LLC

With a Solo 401k Plan, the plan itself can make real estate and other investments without the need for an LLC, which depending on the state of formation could prove costly. Since a 401(k) plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC.

6. Better Creditor Protection

In general, a Solo 401k Plan offers greater creditor protection than a Traditional IRA. The 2005 Bankruptcy Act generally protects all 401(k) Plan assets from creditor attack in a bankruptcy proceeding. In addition, most states offer greater creditor protection to a Solo 401k-qualified retirement plan than a Traditional Self-Directed IRA outside of bankruptcy.

7. Easy Administration

With a Solo 401k Plan, there is no annual tax filing or information returns for any plan that has less than $250,000 in plan assets. The plan offers affordable and easy administration. In the case of a Solo 401k Plan with greater than $250,000, a simple 2-page IRS Form 5500-EZ is required to be filed. The tax professionals at the IRA Financial Group will help you complete the IRS Form.

8. IRS Approved

The Solo 401k Plan is an IRS-approved qualified retirement plan. IRA Financial Group’s Solo 401k Plan comes with an IRS opinion letter which confirms the validity of the plan and is a safeguard against any potential IRS audit.

9. Open Architecture Plan

IRA Financial Group‘s Solo 401k Plan is an open architecture, self-directed plan that will allow you to make traditional as well as alternative asset investments, such as real estate by simply writing a check. As trustee of the Solo 401k Plan, you will have “checkbook control” over your retirement assets and make the investments you want when you want.

The Solo 401k plan is unique and so popular because it is designed explicitly for small, owner only businesses. The many features of the plan discussed above is why it appealing and popular among self-employed business owners. Choosing a Solo 401k vs. Self-Directed IRA LLC makes sense if you are eligible.

However, if you are not eligible for the plan, the Self-Directed IRA is the better option. When comparing the Self-Directed IRA to the Traditional IRA, you receive greater control and more investment freedom. Regardless of eligibility, the investments you can make with a Self-Directed Solo 401(k) and a Self-Directed IRA are the same. Enjoy the freedom to invest in what you know, while taking full control over your retirement.

Learn More

Solo 401(k) Investments

Self-Directed IRA Investments

Did You Know?

The Solo 401k is ideal for businesses with only an owner and a spouse as employees. It has a higher contribution limit when compared with a Self-Directed IRA and offers several other advantages. Contributions can be made by the employee and a spouse working for the business. Contact IRA Financial for more information and to get started.


Latest Content

Send Us a Message!