At one point in everybody’s life they have or will contemplate the dilemma of what retirement plan is best suited for them. There are over 45 million IRA today. However, that does not necessarily mean the Self-Directed IRA is the right retirement strategy. A Self-Directed IRA, which is governed by the rules pursuant to IRC 408, is the most common of retirement strategy simply because it is available to anyone that earns income subject to self-employment tax. The determination of whether one can enhance their retirement savings with a Solo 401(k) wholly depends on whether that individual is self-employed and has a business. Note – a Solo 401(k) Plan is also known as an Individual 401k or a Self Directed 401(k).
There are a number of significant advantages of establishing a Solo 401(k) over a Self-Directed IRA LLC. Remember, that this option is only available to an individual that is self-employed or has a business with no full-time employees (an employee who works more than 1000 hours over the course of the year). In the case of an individual who is not self-employed, the Self-Directed IRA LLC would be the best retirement/investment strategy.
The first major advantage of establishing a Solo 401(k) plan over a Self-Directed IRA LLC is in the area of annual contributions. While an IRA only allows a $5,500 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), a plan participant of a Solo 401(k) Plan can make annual contributions for 2013 of up to $51,000 annually with an additional $5,500 catch up contribution for those over age 50. In addition, whereas, the maximum Roth IRA contribution is $5500 ($6500 if individual is over the age of 50), the Solo 401(k) Plan will allow the plan participant to make Roth contributions of up to $17,500 ($23,000 if the individual is over the age of 50).
A second major advantage of establishing a Solo 401(k) plan over a Self-Directed IRA LLC is the ability to borrow retirement funds tax and penalty free. While a Self-Directed IRA LLC 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) for any purpose, including paying 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).
Thirdly, unlike a Self-Directed IRA LLC, the Solo 401(k) bank account can be opened 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 Solo 401(k) trust are under the sole authority of the plan trustee (you). 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. Making a Solo 401(k) Plan investment is as simple as writing a check.
Fourthly, like a Self-Directed IRA contributions to a Solo 401(k) plan are completely discretionary. You always have the option to try to contribute as much as legally possible, but you always have the option of reducing or even suspending plan contributions if necessary.
Fifthly, like a Self-Directed IRA LLC, a Solo 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). The attorneys at the IRA Financial Group will help you complete the IRS Form 5500-EZ.
Lastly, for those looking to purchase real estate with their retirement funds, using a Solo 401(k) Plan will allow one 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), whereas, using a non recourse loan with IRA funds would trigger the UBTI tax.