Oct
10
Self-Directed 401(k) Vs Self-Directed IRA
October 10, 2008 | | Leave a Comment
Basically, the SD IRA and 401(k), in some minds, are very tax They are both tax-free or tax-deferred “trust” accounts for the benefit of one’s retirement assets. Like any other employer-sponsored retirement plan (e.g., 401(k), 403(b), 457(b)), they are designed to provide, in tax mistakes tax-friendly environment, the contribution towards and growth of such assets prior to an individual’s distribution of these funds.
So what is the basic difference?
If an individual or their spouse earn income through self-employment, as a sole proprietor, partnership, LLC, corporation or as an independent contractor without any employees, then the individual is eligible to this option. But, all things being considered, why would somebody want a SD 401(k)? I mean, don’t they follow the same rules as a SD IRA?
In short, no. There are two primary distinctions between the two:
1) For the 2008 tax year, IRA contributions are limited to $5,000 (under the age of 50/$6,000 over the age of 50) where in contrast to this 401(k) contributions have limits of $15,500/$20,500 respectively. What SOUNDS and IS better? Neither of these also takes into account what you can do if your spouse is an officer of your company or works with you and the respective contribution levels.
2) Loan Provisions — Simply stated, an individual cannot take a loan from their IRA but they are eligible for a loan provision from their 401k. I took out a loan from my account. I am investing in myself…..is this good or bad?! I think it is good. You do need to follow IRS regulations on this topic, but you want to. The rules are there to protect you. These are YOUR retirement assets, not monopoly money.
But in my case, I took a loan out and set myself up with a 5 year ammortized loan at 7% interest. I make quarterly payments of principal and interest. Oh, I forgot to ask….who am I repaying with a fair amount of interest? Oh, you are right…it’s me. My payments go right back into my retirement account.
Now, remember, you have to meet the requirement of a true self-employed individual to create a SD 401(k) but, if you do, why wouldn’t you want this type of account. It doesn’t mean the SD IRA is bad, tax mistakes different.
Plus, as nationally recognized tax expert Tim Berry says, “If you conduct a prohibited transaction your IRA blows up.” In layman’s terms that means if you enter into a prohibited transaction, your IRA blows up 
But seriously, within an 401(k) if you enter into a prohibited transaction, you may be able to satisfactorily resolve the issue — however, within your IRA if you do that same transaction, the IRS (generally) will deem your plan to be fully distributed and subject to significant taxation and penalties.
So, remember, if you self-direct and utilize a plan facilitator, make sure that they can assist you with both self-directed status with either an IRA or a 401(k) option. And, as always, do your due diligence on everyone.
John R. Park is President of PGI SelfDirected ( http://www.pgiselfdirected.com ) and co-founding Partner of Fulcrum Investment Network ( http://www.fulcruminvestmentnetwork.com )
Comments
Create a free edublog to get your own comment avatar (and more!)You must be logged in to post a comment.
