Self-Directed SEP IRA

What Are the Advantages of Using a Self-Directed Solo 401(k)?

When most people think about the 401(k), it is usually in traditional terms. They consider it a plan that comes only through an employer when they work with a W2. But the truth is, a 401(k) plan can be more flexible than that. In fact, the Self-Directed Solo 401(k) plan is a handy way for investors to access a new retirement investment vehicle, even when their financial arrangements might be more independent than the average employee.

If you browse our Self-Directed Solo 401(k) page, you’ll discover that many of us here at American IRA like to call this plan the “Self-Directed IRA on steroids.” But what does that mean, exactly? And what are the characteristics that make this account feel like a pumped-up version of the ordinary Self-Directed IRA? Here is what you will need to know:

Contribution Limits Within a Self-Directed Solo 401(k)

Why do some people around here call a Self-Directed Solo 401(k) a “Self-Directed IRA on steroids”? It is not that the two accounts are technically the same. It is that the Self-Directed Solo 401(k) has very different contribution limits from, say, a Self-Directed Traditional IRA. What are those limits? That is the hard part. There will be calculations to do—and an accountant can help you with that.

According to the IRS website, if you’re self-employed, “You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both” one-half of the self-employment tax you pay, and contributions for yourself.

The good news: this generally means that individuals who are self-employed will have high contribution limits through a Self-Directed Solo 401(k). That opens up all sorts of possibilities. Because many investors who seek self-direction are looking to diversify into nontraditional retirement assets such as real estate, precious metals, private companies, and even tax liens, having extra contribution limits available provides more retirement investing freedom.

Other Advantages in the Self-Directed Solo 401(k)

Of course, contribution limits are nice—but they do not tell the whole story. Let us look at a few of the other features of the Self-Directed Solo 401(k) plan that may serve as advantages in the right circumstances:

  • Borrowing from the Self-Directed Solo 401(k), if need be. Of course, it is not anyone’s ideal solution to have to borrow from a 401(k). But this does provide some extra help in an emergency. Keep in mind that there are rules on these types of loans; for example, the investor is expected to pay them back within five years.
  • Simple administration. You will serve as the trustee of your own 401(k) plan, and if you were to work with American IRA, for example, American IRA would serve as the record keeper. It is a simple, straightforward arrangement that makes investing easy and flexible. However, it does mean that you will also have more responsibilities—which is why many people turn to financial professionals and accountants as they set up these accounts.
  • Easy consolidation of accounts. Do you have a 401(k) from another employer and want to start self-directing? Do you have other account types, such as a Traditional IRA? You might be surprised at how easy it is to get everything consolidated into a Self-Directed Solo 401(k), which helps you to leverage the existing retirement funds you have set aside.

A Self-Directed Solo 401(k) might sound complicated, but at the heart of it all, it is simple. It is a new way for you to exercise independence and control over your retirement finances. Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at