Rental Property Investor · San Francisco, CA · Member since 2019 · 42 posts · 16 votes
When two different financial / tax advisors encouraged me to look at solo IRA or 401(k), I figured they both can't be wrong!
I spent the weekend visiting lots of websites and reading lots of content. I'm down to three providers that I think have the best educational content, the easiest ways of working with them, and good reputations:
Between the self-directed IRA and the Solo 401k, the Solo 401k is usually the better choice if you're eligible. The Solo 401k requires self-employment activity, but will allow you to take participant loans while the IRA does not.
A few other Solo 401k benefits:
*Compared to an IRA, Solo 401k contribution limits are roughly ten times higher.
*There is no custodial requirement for the 401k.
*You don't need the additional expense and administration of an LLC to have checkbook control.
*There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.
*A spouse can also participate in the same Solo 401k plan.
*The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage.
*The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)
Of course, the threshold considerations are whether (i) you are eligible (i.e. self-employed with no full-time w-2 employees) and (ii) retirement funds in an account that you can rollover (i.e. former employer plan and/or non-Roth IRA that is invested in investments that can be liquidated an acceptable cost).
Assuming that you cross these threshold issues, here are some additional comments/considerations:
1. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).
2. You may wish to confirm that the new 401k provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).
3. You may wish to confirm that the new 401k provider will handle the ongoing compliance support such as any required 5500 filing (e.g. 5500-ez for a one-participant plan with assets in excess of $250,000), any required tax reporting (e.g. 1099-r in the event of a distribution or in-plan Roth conversion), mandatory plan updates and amendments, etc.
4. If you might take a 401k loan, you may wish to confirm that the new 401k provider will prepare the required 401k participant loan documents.
Between the self-directed IRA and the Solo 401k, the Solo 401k is usually the better choice if you're eligible. The Solo 401k requires self-employment activity, but will allow you to take participant loans while the IRA does not.
A few other Solo 401k benefits:
*Compared to an IRA, Solo 401k contribution limits are roughly ten times higher.
*There is no custodial requirement for the 401k.
*You don't need the additional expense and administration of an LLC to have checkbook control.
*There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.
*A spouse can also participate in the same Solo 401k plan.
*The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage.
*The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)
@Justin Windham Jumping on this thread. I have a fulltime gig with a 401k through the employer. But on the side, I buy investment properties in LLCs that all flow into a holding LLC in Wyoming. Would I be eligible for a solo 401k in that case since I am making money on the side through my rentals?
The Solo 401k requires self-employment activity. Your real estate investments might generate passive income as opposed to earned self-employment income. If you do have any earned income from self-employment, the Solo 401k is likely an option for you. The 401k with your employer most likely cannot be rolled over until you leave that job. To find out more about both of these issues, you can talk with your tax advisor about any earned income and ask your 401k administrator if the plan allows for in-service distributions.
When two different financial / tax advisors encouraged me to look at solo IRA or 401(k), I figured they both can't be wrong!
I spent the weekend visiting lots of websites and reading lots of content. I'm down to three providers that I think have the best educational content, the easiest ways of working with them, and good reputations:
I'll post an update to this thread once I choose one and go though the account opening process.
Hate to necropost but did you have a good experience? My understanding about RocketDollar is that they have no compliance offering, vs MySolo401k, which does...making the offerings completely different: RocketDollar will do find to set you up, but then you have to do all the paperwork yourself (or hire a CPA to do it); whereas MySolo401k will do it for you for a few hundred dollars. Was that your experience?