About the time you have figured out self-directed IRAs, you hear about Solo 401k’s.
You have questions and for good reason I might add.
Self-directed IRA’s are a great tool, so is a putter on the green, but from 200 yards out it doesn’t work as well as a 4 iron. The same goes for certain types of investors and investments.
Self directed 401ks are also called Solo 401ks. They were formed by Congress and came to life in late 2006. Sole proprietors, the self-employed, and anyone who has income from a business can have a Solo 401k.
Why would you want a Self-Directed 401k?
Solo 401k’s have several features that are superior to IRAs.
These are:
- Higher contribution limits $51,000 per person vs. $6,000 for an IRA.
- Roth contributions up to $20,000 with no income limits, unlike Roth IRAs.
- Much less onerous prohibited transaction penalties than IRAs.
- Loan provisions are possible.
- No UDIF tax.
The UDIF tax is for real estate. If you purchase a property with an IRA and finance part of it you will still owe taxes on the capital gains of the percentage of the property that was financed. For example, the purchase price is $200k and you finance $100k.
You will pay taxes on 50% of the capital gains. If that same property is purchased and financed the same, but with a 401k, there is NO tax due. How’s that for nice. There are other smaller differences but those depend more on the expertise of the 401k provider.
Also, husband and wife can combine efforts here in a solo 401k and roll existing IRAs and old 401k funds into a newly formed Solo 401k. The only thing you can’t roll in is a Roth IRA.
An overriding need to being successful is to have the proper support for the your investments. There is a bit of administration work to be done, and set up is not a do-it-yourself proposition. You will need someone with expertise to keep everything going smoothly but the Solo 401k can be set up to have the same flexibility that any other self directed account would have.