This is the third installment in the Self Directed Retirement Questions, Answered.
These are questions I’ve been asked, my answers to those questions, and some commentary.
Question: What is the difference between a Self Directed IRA and a Solo 401k?
Answer: A Self Directed IRA requires a Custodian. Custodians are generally banks and investment houses. These Custodians charge fees to baby sit your money and tell you where you can and cannot invest your savings. An SDIRA is far better than a standard IRA, but it can still have high management fees, hoops to jump through, and limitations in what you can invest in.
A Solo 401k, which is designed for the self employed, enables you to invest in anything that the IRS allows. You become the Custodian; therefore you don’t have any filters on your investments (within the framework of the IRS’s allowed investments). You basically don’t have to ask permission to use your own savings as you see fit. Since it is a 401k, you can also borrow up to 50% of the value, up to $50,000. And again, you don’t have to ask permission or fill out piles of paperwork to take out a loan. You draw up the terms, put the terms in your safe, write a check from your 401k to you, and then just make the monthly payments to your 401k. Because you are making payments to your 401k, the interest is essentially free – you are paying yourself! A Solo 401k also enables you to contribute as the employee and the employer; in other words you can contribute over $50,000 a year to your retirement account – or over $100,000 if your spouse is a partner in the business. This is a BIG deal.
My thoughts on the two different approaches boils down to this:
If you can, go with the Solo 401k.