Self Directed Retirement Plans & IRAS
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Self-Directed IRA and Solo 401k
The most popular self-directed retirement accounts include the solo 401k and the self-directed IRA. Both Traditional pretax and Roth after tax contributions can be made to either. Traditional contributions are tax deductible, and the gains grow tax free until distributions begin. Roth contributions are not tax deductible when made, but the gains grow tax free. Following are the similarities and differences between the solo 401k and the self-directed IRA.
The Self-Directed IRA and Solo 401k Similarities
- Both were created by Congress for individuals to save for retirement;
- Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private local businesses, and the stock market, to name a few;
- Both allow for Roth contributions;
- Both are subject to prohibited transaction rules;
- Both are subject to federal taxes at time of distribution;
- Both allow for checkbook control for placing alternative investments;
- Both may be invested in annuities;
- Both are protected from creditors;
- Both allow for nondeductible contributions;
- Both are prohibited from investing in assets listed under I.R.C. 408(m); and
- Neither may be invested in your own “Retirement Funds Business Finance Plan” (ROBS)
The Self-Directed IRA and Solo 401k Differences
- In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
- To open a self-directed IRA, self-employment income is not required;
- In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (self-directed IRA LLC) must be utilized;
- Our solo 401k allows for checkbook control from the onset;
- You can personally borrow money from your solo 401k;
- You can’t borrow from your IRA even for hardships;
- The Solo 401k may invest in life insurance;
- The self-directed IRA may not invest in life insurance;
- The solo 401k allows higher contributions (for 2017, the solo 401k contribution limit is $54,000, whereas the self-directed IRA contribution limit is $5,500);
- The solo 401k business owner can serve as Trustee of the solo 401k;
- The self-directed IRA participant can serve as Manager of an LLC maintained by their IRA with a proper custodian in place;
- When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
- Rollovers and transfers from IRAs or qualified plans (nearly anything from an old employer) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
- When funds are rolled over or transferred to a self-directed IRA, the amount deposited is reported on Form 5498 by the receiving custodian.
- Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are tax-free, but still recorded on lines 15a and 15b of Form 1040;
- Pre-tax IRA contributions on reported on line 32 of Form 1040;
- Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
- Roth solo 401k funds are subject to required minimum distributions after age 70 1/2;
- A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
- Roth IRA funds are not subject to requirement minimum distributions (RMDs);
- The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
- The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
- At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
- At termination, the self-directed IRA is only required to file a form 1099-R.
We’re the only firm that offers both basic and checkbook controlled self-directed accounts in both Solo 401(k) and IRA options. Our interests are aligned with yours. Instead of trying to figure out how to get a square peg in a round hole, we offer the option of a round peg.
Our pricing is fair and reasonable. Our support, flexibility, and knowledge base set us apart from the crowd and will both save you money and help you make more of it.