Benefits of a Self-Directed Roth 401(k)

Real estate investors are typically excellent candidates for self-directed retirement accounts, in no small part because of their experience with evaluating investment opportunities. But there is a world of options: Self-Directed IRAs, 401(k)s, and of course, the Roth options for both. To make the best choice for your situation, you must understand your options. Today, we are going to focus on the Self-Directed Roth 401(k) and its many benefits. Read on to learn the reasons many investors love Roth accounts and whether this option is the retirement plan for you.
Flexibility With Your Investments
The Self-Directed Roth 401(k) featuring Checkbook Control gives investors more leeway to invest in what they understand. Rather than being confined to traditional investment choices like stocks, bonds, or whatever financial products a custodian happens to be pushing, you can invest your retirement funds into nearly any type of asset you wish. These can include nontraditional investments as diverse as real estate, lending transactions, and even the various cryptocurrencies. While there are three types of assets Roth accounts cannot invest in, that leaves literally everything else in the world as an option.

Multiple Contribution Options

Roth accounts are famous for their ability to grow your retirement assets tax-free. Why? Because you typically pay taxes on the "front end," meaning that your contributions have already been taxed. When retirement rolls around, you take your distributions totally tax free. You've paid the piper at that point.
While this is reason enough for many investors to be crazy about Roth-style accounts, the Self-Directed Roth 401(k) also allows you to make pre-tax contributions. That's right: you can truly have it both ways. Of course, there's a caveat. If you choose to make traditional tax-deferred contributions, you may, but you must place them inside of a Traditional 401(k) first. Then, they can be converted into the Roth account, or you can simply allow both accounts to grow. Our experienced professionals can help you with this process and judgment call.

Ability to Make Higher Contributions At Once and Overall

Total plan contributions for Self-Directed Roth 401(k)s are much higher. You can contribute a whopping $50,000 annually--or $55,000 if you're over 50. That's over twice what the IRS allows for IRAs.
We should also note that the Self-Directed Roth 401(k) blows any IRA's individual monthly contribution limits out of the water. Traditional IRAs limit you to a measly $5,500 if you're under 50, and $6,500 if over 50. Although, if you're going to do an IRA at all, we highly recommend the Self-Directed Roth IRA. Learn more from our previous educational article on the benefits of converting your retirement account to a Roth. These perks will also apply to your Self-Directed Roth 401(k).

Exemption From Income Limitations

You want to contribute the maximum amount possible to your account, don't you? Of course you do! That's why it's a huge advantage that this type of account is exempt from the Modified Gross Income (MGI)  limitations. We've written about the MGI limits before if you want more details. But the short version is this: your income will not limit your contributions. This simply isn't the case with Roth IRAs.
And remember: these aren't all of the advantages, just four of our favorites. When in doubt, reach out to the pros. Royal Legal Solutions can help you establish your 401(k) and ensure its compliance.

Last Updated: 
August 16, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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