Self Directed IRA vs 401k

9 Replies

Hello everyone I am new to the site and to real estate investing and wanted an opinion on whether to go with the SDIRA or the SD401k? I understand a ROTH cannot be rolled into the 401k though. Finally, I'm researching Broad Financial (they will let me place $ in local bank) anyone familiar with them?

All feedback welcome and appreciated. Thanks

@John Baptiste

If you compare SD IRA with truly self directed 401k plan - the answer is obvious: Solo 401k is the winner! While Roth IRA can not be rolled over into Solo 401k, you can make new Roth contributions into 401k, which are significantly higher than Roth IRA. There are several other major benefits. Take a look at few:

  • Solo 401k offers Participant Loan Feature which allows you to access your retirement funds any time for any reason (example would be investing in a transactions that would be otherwise prohibited). It's like creating your own bank that will never turn you down. Some may never use this feature, but it is sure great to have this option. With an IRA you canâ??t touch your money until you are over 59 1/2 and if you do - you are taxed and penalized heavily!
  • Roth Solo 401(k) - you can maintain additional, separate 'bucket' under your Solo 401(k) plan where you could make after tax contributions, thus, investing tax free for the rest of your life. The limit on Roth contribution in Solo 401k is up to $23,000 (compared to $6,500 in Roth IRA) and there is no income restriction on contributions unlike with Roth IRA. Also, pre-tax portion could be converted into after-tax (Roth). (Tax professional should be consulted prior doing so).
  • With Solo 401(k) custodian is not required. The plan can be self-administered which could mean significant savings $$ on custodian, transactions and asset based fees that would be there in a case of SD IRA. You also have a checkbook control and dont have to obtain custodian consent when making investments. This could be huge on time-sensitive investments and give great level of convenience.
  • Large contribution limit of up to $57,000 (significantly higher than an IRA, which is only $6,500). In additional to all other benefits mentioned above, Solo 401k is a great tax-sheltering vehicle, allowing you to shelter huge amount of money from taxes.
  • When you use financing to acquire real estate in a SD IRA, the portion of the income from the property will be subject to UDFI tax (type of the UBIT of about 35%)! When you finance real estate inside of Solo 401k â?? it would be exempt from UDFI, which makes it even more attractive to use for real estate investment with leverage.

Solo 401k subject has been discussed here on BP in details many times and you can find a lot more info and learn about the experience of those who used it.

The bottom line is you should educate yourself, use resources that are available to you and make informed decisions.

I heard a lot about solo 401K, and i fall in love with that idea, even so many rules on it, but it looks so good for me for my long term goal.

Right now I don't know where to start because i don't have any 401K even I working full time.

My employer doesn't provide any kind of retirement plan :( , that's why i will jump to flipping

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Originally posted by Account Closed:

My employer doesn't provide any kind of retirement plan :( , that's why i will jump to flipping

Diyan, use this vehicle to shelter some of the income from your flips into Roth Solo 401k. Then you can invest tax free for the rest of your life! You are young and the returns could be infinite if invest correctly.

Hey John,

The individual 401k is definitely the superior plan but you should weigh all your options. Do you really want to do everything yourself? There are some full-service providers out there that don't only offer you the plan documents but also the investment administration.

Think twice about using a one-time purchase plan document and be sure that if you do purchase a "package" that it comes backed with a promise to update the plan if rules change (re-statement of documents).

Good luck!

@Francis A.

I just held a webinar on this last night and talked about some of the best uses for a solo k. The biggest questions you need to get answered from whoever sets it up for you:

1. Do they create the trust documents as well? A 401k is held in a trust, so you actually need to trust set up before you can start everything.

2. How many clients have they worked with in the past?

3. What education and support do they provide after you're all set up?

4. Will you get access to a regular bank account with your trust, or do you have to use them (ie Chase Bank, credit union, etc.)?

All that being said, since I set these up, I am somewhat biased to who you would use. :-)

However, there are plenty of great resources here on BP, so just scope them out before you get started.

@Jeff Barnes,

Thanks for adding another option into the mix. I certainly have my homework cut out. The last thing I need is for something to gum up the trigger when I need to access funds to make a purchase.

I will definitely read up on your outfit's offerings alongside all the others that I am looking at.

Thanks again for chiming in and I'm sure I'll be "seeing" you around BP.