Chat with us, powered by LiveChat
Mon - Thurs : 08:00 am - 05:00 pm MST
Fri : 08:00 am - 04:30 pm MST
505-847-8944 New Accounts
888-205-6036 Client Services

Self-Directed Individual 401K Plans: Top 10 Benefits

benefits of self-directed 401k plan

Self-Directed Individual 401K Plans: Top 10 Benefits

There are plenty of benefits to working for yourself, but one thing that independent contractors, freelancers, and small business owners miss out on is employer-sponsored investment options.

This is particularly true when it comes to a 401k. Fortunately, an individual 401k, also known as a solo 401k, makes it possible for the self-employed to leverage many of the same benefits that come with employer-sponsored retirement plans.

Investors looking for more control over their retirement efforts can do so through self-directed 401k plans. There are several benefits associated with self-directed investment accounts, but here are a few key ones to keep in mind.

benefits of self-directed 401k plan

1. Control

A self-directed 401k plan, like a self-directed IRA or SEP, automatically puts the control back in the hands of the investor. When you enroll in an individual 401k, you make the decisions about your retirement. That makes it easier to reach your short and long-term goals, which isn’t always true of one-size-fits-all plans.

2. Diverse Investment Options

When you invest through a traditional 401k, your options are limited to stocks, bonds, mutual funds, etc. With an individual 401k, you can invest your money in different verticals, like real estate or commodities. This allows you to grow a diverse investment portfolio.

3. High Contribution Limits

Both IRAs and 401ks have contribution limits, but if an individual 401k plan has a much higher annual limit. In 2020, the annual IRA contribution limit will increase to $6,000 ($7,000 for individuals over 50). Investors with a 401k can make annual contributions up to $57,000 annual.

4. Liquidity

Ideally, you won’t need to draw from your retirement savings, but sometimes it’s necessary. If you plan on using your retirement savings to finance home purchases, education expenses, or other investment opportunities, then a 401k can be a good choice.

Many investment options, including IRAs, penalize investors who make early withdrawals. With an individual 401k, however, you’ll be able to take a loan against your savings without worrying about taxes or penalties.

5. No Business Structure Requirements

Though many self-employed individuals will formalize their business structure and register as an LLC, partnership, or S-Corp, others will not. To be eligible for an individual 401k plan, investors must be able to prove that they earn a self-employed income, but there are no formal business structure requirements. Sole-proprietors can easily take advantage of this type of investment vehicle.

Free Gift

6. Tax Advantages

When you make contributions to an individual 401k, you can choose to do so on a pre-tax basis, which will reduce your taxable income for the year in which the contributions were made. However, an individual 401k also offers a Roth component. Roth contributions are made after taxes, meaning there is no upfront tax advantage, but you will be able to make tax free withdrawals in the future.

7. Limited Eligibility Requirements

A self-directed individual 401k has few eligibility requirements. As long as you can prove that you earn an income as a self-employed individual and that you have no employees other than your spouse, you will likely meet the eligibility requirements.

8. UDFI Exemptions

If you plan to use your investment to buy real estate, an individual 401k can help you avoid what’s known as unrelated debt-financed income (UDFI) taxes. UDFI tax law can be complicated, but when it comes to an individual 401k, it means that any gains or income made through a real estate investment can be reinvested into your account tax-deferred. This is a distinction worth noting as gains from real estate financed through an IRA can potentially be taxed under UDFI.

9. Rollover Provisions.

It’s not uncommon for investors to have more than one retirement account, but you have a 401k from a previous employer or an existing IRA or SEP? In many cases, you can roll other retirement investment accounts into your individual 401k plan. This makes it easier to leverage your entire savings, be it in the form of a much-needed loan or take advantage of another investment opportunity.

10. Easy to Administer

Investing can be complex, particularly when it comes to annual filing requirements. Fortunately, individual 401k plans make it much easier as there are no annual filing requirements unless your plan exceeds $250,000. And, even if your assets exceed that amount, your filing requirements are typically limited to a single form, IRS 5500-EZ.

Just because you’re self-employed doesn’t mean you need to miss out on the many benefits a 401k can offer. Individual 401k plans are easy, affordable, and flexible, allowing you to save for the future you want. There’s no one-size-fits-all approach to retirement, and that means you deserve a plan that works for you. A self-directed individual 401k offers just that.