Should You Choose a Solo 401k Over A Self-Directed IRA?
Here at Royal Legal Solutions we offer both Solo 401k plans and Self-Directed IRA LLC services. So you can trust us when we say the plan that’s right for you really depends on you, there is no one size fits all solution.
A Solo 401k Plan is usually the best option for self employed individuals.
What is a Solo 401k plan?
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 perhaps their spouse.
The Solo 401k Plan is not a new type of plan. It is a traditional 401k plan covering only one employee.
Note: A Solo 401k plan offers you the ability to contribute up to $60,000 each year.
9 Reasons why a solo 401k is better for you if you’re self employed.
There are a number of options that 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 Traditional IRA.
Here’s 9 of them!
- Reach your Max Contribution Amount Quicker.
A Solo 401k Plan includes both an employee and profit sharing contribution option, whereas, a Traditional IRA has a low annual contribution limit.
How much faster?
Under the 2017 Solo 401k contribution rules, if you’re under the age of 50 you can make a maximum employee deferral contribution in the amount of $18,000.
On the profit sharing side, your 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 your employee deferral, of $54,000.
If you’re over the age of 50, you can make a maximum employee deferral contribution in the amount of $24,000. Up to a combined maximum of $60,000.
- No Roth Feature.
A Solo 401k plan contribution can be made in pre-tax or Roth (after-tax) format. Whereas, in the case of a Self Directed IRA, contributions can only be made in pre-tax format.
- Tax-Free Loan Option.
With a Solo 401K Plan you can borrow up to $50,000 or 50% of your account value in the form of a loan for any purpose. With a Traditional Self-Directed IRA, you can’t even borrow $1 dollar from the IRA without triggering a prohibited transaction.
- You Can Use Non-recourse Leverage & 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.
However, the non-recourse leverage exception is only applicable to 401k qualified retirement plans and does not apply to IRAs. In other words, using a Self-Directed IRA to make a real estate investment involving non-recourse financing would trigger the UBTI tax.
- Open the Account at Any Local Bank.
With a Solo 401k Plan, the 401k 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.
- 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 can be expensive.
Since a 401k plan is a trust, you can be the trustee on behalf of the trust and can take title to a real estate asset without the need for an LLC.
- Better Creditor Protection.
A Solo 401k Plan offers you greater creditor protection than a Traditional IRA. The 2005 Bankruptcy Act protects all 401k Plan assets from creditor attack in a bankruptcy proceeding.
Note: Most states also offer greater creditor protection to a Solo 401k than a Self-Directed IRA outside of bankruptcy.
- Easy Administration.
With a Solo 401k Plan there is no paperwork required if your plan has less than $250,000 in plan assets.
Note: 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. Royal Legal Solutions can help you with that.
- Flexible Structure.
Royal Legal Solution’s Solo 401k Plan is a flexible, self-directed plan that will allow you to make traditional as well as non-traditional investments, such as real estate, by simply writing a check.
The bottom line.
The Solo 401k plan was designed with owner only businesses in mind. If you’re self employed, there’s not too many other plans out there that offer more benefits than the Solo 401k!
If you’re interested in learning more about Solo 401k’s, try reading more of the articles Royal Legal Solutions has written on them here on this website. Or you can call Royal Legal Solutions today at (512) 757–3994 to schedule your free 1-on-1 consultation.