Solo 401k vs. Self Directed IRA

Why should you use Solo 401k Plan instead of a Self Directed IRA?

Self Directed Solo 401k is more advantageous compared to Self Directed IRA.  Let’s take a look why.

Solo 401k Loan Feature

You are not allowed to barrow even a penny from Self Directed IRA.  If you take any money from your IRA, it will be deemed a taxable distribution, thus you will be taxes (and penalized if you take the funds prior to age 59 ½). However, with Individual 401k business owner can borrow from his Solo 401k Plan.  This feature is known as a Solo 401k Participant Loan without having to pay distribution taxes or penalties. The maximum Solo 401k Loan amount is 50% of the account holder’s balance or $50,000, whichever is less.

With Solo 401k you can make much higher contributions

With Self Directed IRA maximum contribution limit is $5,000 and if you are over age 50 you are allowed to contribute additional $1,000 (called catch-up contribution).  Solo 401k gives you the ability to contribute up to $50,000 plus $5,500 catch up contribution if you are over age 50 or older for a total of $55,500!  This is nearly 10 times more compared to an IRA!

Roth Solo 401k

With self-directed Roth IRA your maximum contribution limit is $5,000 ($6,000 if you are over 50 year of age).  With Solo 401k Roth sub-account you can contribute $17,000 per year plus additional $5,500 catch-up contribution if you are over age 50 for a total of $22,500!

Solo 401k is exempt from UBIT

Self Directed IRA is subject to payment of UBIT (unrelated business income tax) when it utilizes debt financing to invest in real estate, a Solo 401k is not subject to payment of UBIT when it uses a non-recourse loan to invest in real estate.

Custodian is not required

The rules allow the business owner to be the Trustee of his Solo 401k assets, this means you don’t have hire a custodian to hold your assets.  The benefits of this are: (1) processing time is significantly reduced because you don’t have to submit investment processing directions to the custodian and (2) processing and holding fees are completely eliminated.