Self Directed IRA and 401k - What Is It

Financial Plan & Invest

It is important that you plan your retirement in good time as this ensures you will not burden your kids and you will enjoy your sunset years. One of the best ways to save is through self directed IRA and 401k. So, what are these? Self-directed IRA is an Individual Retirement Arrangement whereby you are required to make an investment decision and an investment on behalf of your retirement plan. In other cases, the IRS (Internal Revenue Service) requires that a custodian or a qualified trustee holds the IRA asset on your behalf.

In self-directed IRA, the custodian/trustee maintains all assets as well as records such as transactions, he will file the required IRS reports, he will assist you understand the regulations and rules pertaining to prohibited transactions, he will issue you client statements, and he will help you with other administrative duties.

The custodian will give you different standard assets types for you to choose from. These could be stocks, mutual funds, bonds, and several others. You are also able to invest money in a non-traditional investment, in a start-up, in real estate, and everywhere else you wish. The risk is much greater, but so is the reward.

There are several asset types that are prohibited when it comes to self-directed IRA investments. These include such collectables as rugs, metals (apart from some bullion), artwork, gems, coins (apart from some minted coins from the U.S. Treasury), alcoholic beverages, some tangible personal property, and stamps. In most cases, the early withdrawal penalty is 10%. You cannot borrow from a self-directed IRA, you cannot sell a property to it, your compensation for managing it cannot be unreasonable, and you cannot use it to get a loan. Limited Liability Company (LLC) IRA structures are used by self-directed IRA investors to minimize paperwork, processing delays, and fees.

When considering self directed IRA and 401k, it is important that you know what a 401k. A self-directed 401K, or a solo 401K plan, is meant for self-employed business owners. With this plan, they are able to use their retirement funds for almost any investment tax-free. They could even invest in real estate.

With a self-directed 401k, you do not need a custodian to consent. With the plan, the limit as to how much you can deposit is very high (it is up to $51,000 if you are under 50 and $56,500 if you are over 50). This is very high compared to a standard 401K plan whose limit is $17,000 (and an additional $5,500 if you are over 50 years of age). You could design the self-directed 401K plan with a designated Roth component if you would like to make a Roth type contribution (an after-tax contribution) from time to time.

One of the greatest reasons why a self-directed 401K plan is popular amongst small business owners is that the IRS has designed this exactly for the self-employed. Unlike the conventional 401(k) plans, participants of the self-directed 401K plan can diversify the portfolio. This diversification is important because it allows you to spread the risk.

The plan can also be adopted by a corporation, a partnership, or an LLC. You are allowed to borrow 50% of your account value or $50,000, whichever is less. You could get a loan for business or personal investments, a vacation, a car, or whatever else you want. This loan is tax free and can be paid back over a period of 5 years. When considering self directed IRA and 401k, note that other benefits of a self directed 401k plan are checkbook control, easy administration, and asset & creditor protection.