Why Solo Roth Solo 401(K)’s are better than a Self-Directed IRA
This is Part 6 of a 9 part series focused on educating others on retirement accounts, alternate means of investing with these accounts, and ultimately how we can provide multiple forms of investment opportunities with these accounts within our business in which you can attain high rates of returns at substantially low risk.
A Solo 401(k) has better features than those of an Individual Retirement Account (IRA) in most cases. The following are some of the advantages:
- Solo 401(k), you can invest not only as an employer, but also as an employee which increases the contribution limit. Moreover, your spouse is also allowed to contribute. So the two of you can combine your investment funds.
- You can borrow or loan the money lying in Solo 401(K) up to 50% of the total value or a maximum of $50,000, whichever is lower, at a comparatively lower interest rate. You can do whatever you want with the borrowed money, such as lending it to investors or small businesses.
- Unlike the IRA, there are no income restrictions.
- Real estate bought through an IRA that is leveraged with mortgage financing creates taxable Unrelated Debt Financed Income (UDFI). The tax could be up to as high as 35%. However, you get an exemption from the UDFI rules if you buy real estate through a Solo 401(k) plan.
- Unlike an IRA, the Solo 401(K) does not require a custodian.
- The set up costs of a Solo 401(K) are lower.
- Finally, less paperwork makes Solo 401(K) a much better choice as well.
Difference between Solo 401(K) and Roth solo 401(K)
The primary difference between Solo 401(K) and Roth solo 401(K) is basically the same as that between a traditional IRA and Roth IRA. In a Solo 401(K), the money grows tax-free, but you have to pay taxes when you withdraw the money in retirement. Roth Solo 401(K) contributions are made with after-tax dollars and are not taxed again, nor the gains, as long as you are at least 59 1/2 and youve held the account for five years or more (See our previous blogs for more information on the “seasoning” terms).
Be sure to keep following this series as we help bring all this information together to show you how working with us and knowing how to take advantage of these tools can optimize the growth of wealth for your future.