Self-Directed Roth IRA or Solo 401(k)? Which should I Contribute To First?

As it is so often in investing, the answer is “it depends.” Both the Self-Directed Roth IRA and the Solo 401(k) are very popular among investors who embrace the advantages of self-directed strategies. But they are not only taxed differently – they are also structured differently.

Consider prioritizing your Self-Directed Roth IRA first under the following circumstances:

  • You are relatively young, or have an extra long time horizon.
  • You want to pass a lot of money on to heirs
  • You are sensitive to a possible estate tax down the road. Roth IRAs have a lower estate tax footprint, since they move money that your estate will eventually have to pay in taxes out of the taxable estate.
  • Your income is lower now than it will be in the future.
  • Your tax bracket is lower now than it will be in the future. That is, would you rather pay your income tax rate now? Or would you rather pay the rate you’ll be in when you retire? If you’re probably paying a lower rate now, then emphasize the Self-Directed Roth IRA.
  • You’re in a state that provides a lot of creditor protection to IRAs in the event of bankruptcy.
  • You don’t want to have to worry about required minimum distributions down the road
  • You don’t own a company or have a lot of self-employed income you can contribute to a self-directed Solo 401(k)
  • You’re not getting a match from an employer’s 401(k) other than a solo 401(k) that you control
  • You have a weak 401(k) plan at work that won’t let you self-direct, and has lousy mutual funds and other investment options, or only offers high-expense funds.
  • You don’t expect to need to borrow money out of your 401(k) in the future.
  • You want the more flexible hardship withdrawal options that IRAs come with.

On the other hand, maxing out a solo 401(k) plan, or any other 401(k) plan that has your desired features may work best for you under the following circumstances:

  • You can pick up an employers’ matching funds.
  • You own a C corporation and would pay high taxes and double taxation on money that doesn’t go into a tax-deferred 401(k) plan.
  • You want to maximize the amount you can contribute and only run a single plan for the time being.
  • You want to be able to take a loan out of your Solo 401(k)
  • You want to retire early and be able to make early withdrawals. 401(k) rules let you take money out of your plan at age 55 without a 10 percent penalty if you’ve left the company. IRAs make you wait until age 59½.
  • You want to leverage, for example, to buy real estate within your retirement account with a mortgage. In an IRA, you’d have to pay an additional tax, called the unrelated business income tax, on income and capital gains attributable to other peoples’ money. In a 401(k), you may be able to avoid that tax. Speak with your tax advisor for more information.
  • You want extra protection against creditors, including the IRS. 401(k)s are much tougher for creditors to crack.

American IRA, LLC provides top-notch administration for owners of Self-Directed Roth IRAs or self-directed 401(k)s. Our services allow you to tap the tremendous tax advantages of using self-directed retirement accounts but also maximize your choices and options.

For more information, call American IRA, LLC today at 866-7500-IRA(472), or visit us on the Web at

We look forward to working with you.

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