Comparing a Self-Directed Solo 401k With a Self-Directed IRA


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Solo 401k and the Self-Directed IRA are the well-known types of self-directed retirement accounts. Pre-tax and Roth after-tax contributions can be made to these accounts. While pre-tax contributions are tax deductible, Roth IRAs and Roth Solo 401k contributions are not. However, all gains grow free tax until their distributions begin. This article will give the similarities and differences of Solo 401k and the Self-Directed IRAs.

Similarities of Self-Directed IRA and Solo 401k

  1. The Congress created both to help individuals save for their retirement.
  2. Both have alternative investment options to invest in, such as real estate, private company shares etc.
  3. Both are protected from creditors.
  4. Both may be invested in annuities.
  5. Checkbook control may be used in both instances to place alternative investments.
  6. Both allow for Roth contributions.
  7. Prohibited transaction rules apply to both.
  8. Both are required to file federal taxes at the time of distribution.
  9. Both allow for non-deductible contributions.
  10. Both plans are prohibited from investing in certain assets listed under IRC 408 (m)
  11. Both cannot be invested in one’s own Retirement Funds Business Startup.

Differences between Self-Directed IRA and Solo 401k

  1. One needs to be in a self-employment, either part time or full time to be able to open a Solo 401k. Self-Directed IRA does not require self-employment income.
  2. A solo 401k can allow for immediate checkbook control. Self-Directed IRA requires a limited liability company (Self-Directed IRA LLC) to gain IRA checkbook control.
  3. Solo 401k allows for a solo 401k loan, while it is prohibited to borrow from an IRA.
  4. While solo 401k can be invested in a life insurance, self-directed IRA cannot.
  5. Solo 401k has a high contribution limit, $54,000 for 2017, as compared to only $5,500 for self-directed IRA.
  6. Solo 401k business owners can be the trustees of their solo 401k while the self-directed owner cannot serve as a trustee or custodian of their IRA. A trust company or banking institution is required.
  7. 20% of distributions are withheld from each solo 401k distribution and are required to be submitted to the IRS by the 15th of the month following the date of the distribution.
  8. Rollovers or transfers from IRAs or qualified plans to a solo 401k are reported on Form 5500-EZ, only if the fair market value of the solo 401k exceeds $250,000 as at the end of the plan year. On the other hand, transfers or rollovers to self-directed IRAs are reported annually on Form 5498 by the receiving self-directed custodian by May of the year following the rollover. Rollovers from IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040.
  9. Pre-tax IRA contributions are reported on line 32 of Form 1040 while pre-tax Solo 401k contributions would be classified on line 28 of Form 1040 for self employed taxpayers.
  10. Roth solo 401k funds are subject to required minimum distributions (RMDs) but Roth IRA funds are not.
  11. The fair market values are reported differently. For assets held in a self-directed IRA, they are reported on Form 5498, while those held in solo 401k are reported on Form 5500-EZ.
  12. At termination, Solo 401k file Final Form 5500-EZ and 1099-R, self-directed IRA only files Form 1099-R.

Hopefully, you now understand the differences in the plans. Another issues is to make sure that you consider a mega backdoor Roth IRA. That can be another great option for you.

Paul Sundin

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