What Are Self-Directed Retirement Plans?
There are many additional retirement savings options available to Americans since the introduction of individual retirement accounts (IRAs) as a means of tax-deferred savings plans in 1975. Among these various options offered to the public are self-directed retirement plans, also referred to as self-directed IRAs or self-directed 401(k) plans.
These plans, like traditional IRAs, offer a way for taxpayers to set aside income for their retirement. Like a traditional IRA, annual contributions are tax deductible, and distributions after retirement are subject to income taxes, if applicable. Because the account is funded by an individual, accounts are considered to be self-directed, rather than being the equivalent of a 401(k). This feature is what distinguishes this plan type from other, more traditional retirement plans.
Self-directed IRAs are typically established as a separate account inside an IRA, although a business entity can also be established to act as a custodian for the self-directed IRA. Just like traditional IRAs, self-directed IRAs are established by participating in an IRS-approved IRA account or plan.
Self-Directed Custodial IRA
Vs. Self-Directed Keogh Plan
Self-directed retirement funds are the way of the future with the newly passed “Freedom to Save Act”, and they can be an amazing tool if you are handling your finances responsibly. The only thing that will allow you to fully take advantage of these accounts is that you will need a custodian to manage the account for you.
If you have not done much research into the details of these accounts, you are probably wondering what the differences are between the two types of custodians. Here’s what you need to know to better understand the differences between the Self-Directed Custodial IRA vs. Self-directed Keogh Plan.
Self-Directed Custodial IRA
Regulated by the IRS, you would be dealing directly with a custodian allowing you to invest your retirement funds into a number of different assets listed in the IRS Tax Code. There are limits on the type of assets that can be held in the self-directed custodial IRA, and the assets have to be qualified according to the standards of the IRS. The IRS also places limitations on the number of transactions that can be placed in the account.
Pros
The types of plans you can choose from depend on the size of the company. If you work for a small employer, there may not be an option to choose a 401(k) plan.
Regardless of what type of plan you choose, you can expect to find:
Low start-up costs.
Low or no ongoing annual expenses.
Flexibility regarding how contributions are invested (for 401(k)s).
Cons
Idered retirement plan options and ready to take the next step? These links will help distinguished among your various options:
- Individual 401(k)
- SIMPLE IRA
- SEP IRA
- Solo 401(k)
- Profit Sharing
- Money Purchase Pension Plan
Each plan has its own benefits and pitfalls, so it’s important to understand your options before you begin. Once you choose a plan, here are some tips for how to make it work for you.
Checkbook IRA
A Checkbook IRA is what it sounds like – you transfer money from your checking account into the account of your self-directed IRA. Many people choose this option because it is convenient; you can transfer money from your bank account at any time to your self-directed IRA. In this case, your IRA custodian is the bank. The downside to this option is that there are often associated fees and your contributions may be out of your IRA account for some time — as your custodian waits for the money to clear.
Pros
The types of plans you can choose from depend on the size of the company. If you work for a small employer, there may not be an option to choose a 401(k) plan.
Regardless of what type of plan you choose, you can expect to find:
Low start-up costs.
Low or no ongoing annual expenses.
Flexibility regarding how contributions are invested (for 401(k)s).
Cons
Idered retirement plan options and ready to take the next step? These links will help distinguished among your various options:
- Individual 401(k)
- SIMPLE IRA
- SEP IRA
- Solo 401(k)
- Profit Sharing
- Money Purchase Pension Plan
Each plan has its own benefits and pitfalls, so it’s important to understand your options before you begin. Once you choose a plan, here are some tips for how to make it work for you.
Self-Directed Solo 401(k) Plan
A self-directed Solo 401(k) plan is a retirement plan that lets you invest your retirement plan assets in just about any way you'd like.
You can buy and sell shares of anything permitted by the IRS, which means you can invest in real estate, private businesses, precious metals, accounts and much, much more.
With a self-directed Solo 401(k) plan, you have the full ability to control your investments and invest like an all-star.
There are a few requirements to opening a self-directed Solo 401(k) plan.
First, you must be the owner of a business, sometimes called a “sole proprietorship.”
Second, you must set up the retirement plan inside of your business.
Third, you must set aside a portion of your business profit to put into the plan. The limit is 25 percent of the company's profits, plenty of room for many businesses.
And lastly, you cannot be a highly compensated, or HCE, employee of your business. If you are, then you have other 401(k) option.
A self-directed Solo 401(k) plan is a great retirement plan option for small business owners. It is a popular and powerful tax-advantaged retirement plan for business owners that can be implemented quite easily.
Pros
The types of plans you can choose from depend on the size of the company. If you work for a small employer, there may not be an option to choose a 401(k) plan.
Regardless of what type of plan you choose, you can expect to find:
Low start-up costs.
Low or no ongoing annual expenses.
Flexibility regarding how contributions are invested (for 401(k)s).
Cons
Idered retirement plan options and ready to take the next step? These links will help distinguished among your various options:
- Individual 401(k)
- SIMPLE IRA
- SEP IRA
- Solo 401(k)
- Profit Sharing
- Money Purchase Pension Plan
Each plan has its own benefits and pitfalls, so it’s important to understand your options before you begin. Once you choose a plan, here are some tips for how to make it work for you.
Summary
In the US there are about 1,800 companies specializing in self-directed retirement plans. These plans are also referred to as Solo 401Ks, or Individual 401Ks, and can be used by the self-employed, the employer-sponsored IRA, and the Traditional Retirement Plan. Unlike the IRA, the Solo 401K can be used to purchase real estate, investment assets, and investment alternative such as gold and collectible coins.