Solo 401k vs Self Directed IRA
When comparing a Solo 401k vs self-directed IRA, the Solo 401k is the clear winner. Here’s why:
Solo 401k loan feature
The Solo 401k offers a participant loan feature that allows you to borrow from your 401k. A self-directed IRA does not allow you to borrow from the IRA. Any money taken from the IRA would be deemed as a taxable distribution. And you would be potentially penalized, if the funds were taken prior to age 59 ½.
However, the Solo 401k business owner can borrow from his/her plan without paying distribution taxes or penalties. The maximum Solo 401k loan amount is 50% of the account balance or $50,000, whichever is less.
Higher contributions
The Solo 401k gives you the ability to contribute up to $66,000 (plus a $7,500 catch up contribution if you are age 50 and above) for 2023. This is nearly 10 times more than an IRA!
Roth Solo 401k
The Solo 401k includes a Roth sub-account. The employee contribution can be made as a Roth. For 2023, the maximum employee contribution is $22,000 (plus $7,500 catchup if age 50 and above).
Exempt from UBIT
The Solo 401k is not subject to the payment of UBIT (unrelated business income tax) when using a non-recourse loan to invest in real estate. In contrast, the self directed IRA is subject to payment of UBIT when using debt financing to invest in real estate.
Custodian not required
You don’t have to hire a custodian to hold the assets of the Solo 401k. Solo 401k rules allow the business owner to be the trustee of his/her Solo 401k.
This means that processing time is significantly reduced. You don’t have to submit investment directions to the custodian. The fees for processing and holding are also completely eliminated.
Related Terms:
- Roth Solo 401k
- Solo 401k Roth
- Roth Solo 401 k
- Self Directed Roth 401k
- Roth Individual 401k
Mat Ericsson
June 5, 2012 @ 12:08 am
When I researched in the past few weeks, I read that every step you make or change in your ira, you must contact your IRA Custodian. Is that true?
Dmitriy
June 5, 2012 @ 12:40 am
Mat, if you have an account with the custodian, then the answer is ‘yes’. However, with Checkbook IRA or Solo 401k from Sense Financial you take the custodian out of the picture or completely eliminate it. You have complete “Checkbook Control” over your account and don’t need custodian approval for every transaction that you do.