Can I Have a Self-Directed IRA and a Solo 401k?
Self-directed IRAs provide greater flexibility, but typically come with higher fees and complex recordkeeping requirements. You also risk incurring prohibited transactions when investing in nontraditional assets like real estate or startups.
To avoid these complications, partner with an IRA custodian who specializes in self-directed IRAs. Seek providers who offer an LLC structure for your checkbook IRA as well as those that provide the paperwork to establish it.
Yes
Although both self-directed IRAs (SDIRAs) and Solo 401(k) plans offer the ability to contribute, contributing to both could make little sense when dealing with similar income streams.
SDIRAs allow investors to invest in nontraditional assets like real estate, precious metals and mortgage notes – including riskier options like real estate and precious metals that may not be readily liquid like traditional Wall Street investments. It’s essential that these types of investments be thoroughly researched as they may carry more risk. Additionally, their liquidity may differ compared to more mainstream Wall Street investments.
Holding both traditional and self-directed IRAs could make it more challenging to meet contribution and withdrawal regulations, and tax considerations. An IRA typically will be taxed at your ordinary tax rate when withdrawing funds in retirement while 401(k) plans tend to have lower taxes due to being tied to current income levels.
No
Self-directed IRAs offer small business owners and self-employed individuals more investment choices and flexibility than traditional retirement accounts, yet may involve higher fees and more complex recordkeeping requirements.
If you invest in real estate with your SDIRA, all funds should only come from funds deposited into its trust bank account and not personal funds; mixing personal funds in with your IRA investments could potentially create prohibited transactions and tax consequences.
Be certain to comply with all IRA investment rules, particularly the self-dealing rule (IRC 514) which prohibits your IRA from investing in assets that directly benefit you personally. For example, owning rental property through an LLC could help avoid this tax bill; alternatively UBTI tax could apply on any income generated from this rental.
In-Kind Rollover
An in-kind rollover allows you to transfer investments directly from one retirement account into another without going through the 60-day rule or paying taxes or penalties, typically used when moving private placements, real estate assets and other similar assets between accounts.
For small businesses with full-time employees, the Solo 401(k) may be your optimal retirement savings solution, offering higher contribution limits than SEP IRAs and traditional IRAs. But for freelancers or sole proprietors with no full-time employees, SEP IRAs might make more sense as retirement savings plans.
Notably, SEP IRAs cannot invest using non-recourse leverage (IRC 514(c)(iv). To utilize one for this purpose, the best solution would be opening your plan with IRA Financial and taking advantage of their checkbook control service – this allows for purchase of alternative investments like real estate, precious metals or private placements.
Checkbook Control
Checkbook control IRAs allow investors to invest without needing custodian approval, making this structure popular with real estate investors as it reduces transaction fees and allows quick investments. You must ensure all expenses related to real estate property investments come from within the checkbook IRA bank account; any expense paid using personal funds would constitute prohibited transactions and may lead to tax implications.
Checkbook control IRAs offer investors access to various alternative assets, including real estate, private lending, limited liability companies, precious metals and tax liens. However, leveraged real estate investments or collectible investments may trigger Unrelated Business Income Taxes (UBTI).
No matter which structure you select, it’s essential that your employment and retirement goals be taken into consideration when making this important decision. Consulting a financial expert may help clarify your objectives and identify which retirement plan would work best.
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