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.

The Roth IRA Advantage – Tips for Self-Directed IRA Owners

Roth IRAThe Roth IRA, under current law, is a terrific deal – especially for younger investors: You put money in now on an after-tax basis. Your account grows tax-free for as long as you leave the money in there. There’s no income tax, no dividend tax and no capital gains tax on anything left in a Roth IRA for at least five years. And when you take the money out, distributions are tax-free.

Furthermore, Roth IRAs, unlike tax-deferred traditional IRAs, 401(k)s and other tax-deferred investment or savings vehicles, are not subject to required minimum distributions in retirement. That’s great news for self-directed IRA owners who have large, illiquid and indivisible investments within their IRAs or other self-directed retirement accounts.

The Roth IRA, in short, is a terrific home for assets you can hold until retirement age or longer. Here are some advantages – especially for younger investors.

  • Your employer doesn’t control it. The IRA is a personal asset. You own and control your own IRA. Your employer cannot set limits on how you access or use the money. For example, some employers will restrict access to 401(k) funds for in-service workers. Some prohibit in-service withdrawals outright. You have to abide by the plan sponsor’s rules, and those may not be in your interest.
  • IRAs allow you to make penalty-free emergency withdrawals. In the case of a Roth IRA, if you’ve left the money alone in your account for five years, you will owe income taxes only on the investment gain, not on your original contribution (since you already paid taxes on it). You will not owe a penalty if you make the withdrawals for certain emergency expenses:
    • You are deceased
    • You’re disabled
    • You are using the money to fund educational expenses for you or a family member
    • You are a first-time home buyer making a down payment on a house for yourself or a loved one (up to $10,000)
    • You are using the money to pay medical insurance premiums or avoid getting foreclosed on or evicted.
  • There are important advantages to heirs who inherit a Roth IRA as opposed to assets outside of an IRA. For example, your heirs can take advantage of a “stretch IRA” strategy, in which the IRA can continue to grow tax-free throughout the life expectancy of your heir, provided your heir continues to make required withdrawals.
  • You aren’t committed. You can make a contribution this year and skip next year with no penalty.

[tweetthis twitter_handles=”@iraexpert” hidden_hashtags=”#RothIRA”]The Roth IRA, in short, is a terrific home for assets you can hold…[/tweetthis]

Legislative Risk

Roth IRAAt the beginning of this article, we wrote that the Roth IRA is a great deal under current law. But the reality is that the tax benefits of tax-free growth and tax-free withdrawals are all in the future, while you will have already paid tax on dollars you contribute to an IRA this year. In effect, the government has pledged to pay you Tuesday for its hamburger today… but it has no obligation to do so.

What the government giveth, the government can take away. It is possible that Congress will eliminate, limit or means-test the tax benefits of the Roth IRA in the future. However, this is speculation. Under current law, the Roth IRA is a great deal for anyone who wants the tax-free growth available under the Roth IRA banner, and who expects to be in a higher tax bracket when they retire than they are in, currently.

Do you need some help choosing between a Roth IRA and a traditional IRA or other investment vehicle? Call American IRA, LLC at 866-7500-IRA (472). Or visit us at We are among America’s premier administrators of self-directed retirement accounts, and we’re looking forward to hearing from you.





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