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Self-Directed 401k Options

Kaaren Hall0

By Jeffrey Dixon, MBA, CISP, SDIP

Are you self-employed and have no full-time employees, other than yourself?  If your answer is “yes”, consider opening a Solo 401k account.  Self-Directed 401k options make this retirement account very beneficial for self-employed people.

Self-Directed 401k options include:

  • High contribution limits

The Solo 401(k) allows a business contribution and a personal contribution. The max business contribution is the lesser of 25% of business income or $69,000 for 2024 combined. The business contribution is pre-tax. The maximum personal contribution as a participant of the plan is $23,000 ($30,500 if over 50). The personal contribution can be either pre-tax or after-tax (Roth). A spouse is also allowed to make this contribution to their own retirement account in the 401k.

  • Numerous investment assets that can be acquired

What can your Solo(k) invest in? There are many different alternative assets to look at for your Solo 401k. It can acquire rental property and raw land. You can make loans to people or businesses. You can investment in other people’s businesses. Precious metals, tax liens and cryptocurrency are also Self-Directed 401k options.

  • Ability to use financing when buying real estate

Because the 401k plan can use a non-recourse loan to buy real estate, you can grow your retirement savings with debt. You are not allowed to personally guarantee this loan. Should there be a default on the loan, the bank can only foreclose and take the property back to try to sell and recoup the loan funds. The bank cannot go after you personally, or any other assets within the self-directed retirement plan that owns the property that borrowed the money. And you do not personally sign for the loan.  If you would like a listing of non-recourse lenders, we are happy to share ours.  Just email us at info@uDirectIRA.com.

  • Generally, exempt to Unrelated Debt Financed Income taxes (UDFI)

IRAs are subject to a tax when they buy real estate and use financing. The Solo k is exempt to this tax if the loan is for purchase or home improvement.  Discuss this and all taxation issues with your competent tax professional.

  • Take a personal loan from the 401k account

You can take a loan of 50% of the cash value of the 401k account or $50,000, whichever is less. This must be paid back over a five-year period at a market rate.

  • Take distributions starting at 59 ½ without penalty

Taking a distribution from the account before the age of 59 ½ means you will pay a 10% penalty for an early distribution as well as income taxes.

FINAL THOUGHTS:

Consulting a tax professional when deciding between retirement plans (or any decision regarding a retirement account) is a very good idea.  Feel free to contact us if you have questions about this or any IRA-related topic. We can be reached at (866) 447-6598 or info@uDirectIRA.com.  To set up an appointment to talk to a self-directed professional click HERE.