Solo-Ks and other Self Directed 401(k)s, like self directed IRAs can be structured for investing in non-traditional assets like real estate, and allow Roth accounts. However, these plans enjoy several advantages for the self-directed retirement plan investor. First though, these plans are limited by one big disadvantage: These plans are available only to persons involved in a bona fide business. Moreover, you typically must own the business since employer sponsored 401K plans almost never allow investment in non-traditional plan assets such as real estate. Additionally, your annual contributions will be limited by the amount of income of the business (although roll-overs from other plans are not limited). That being said, if you qualify for one of these plans, there are several advantages over self directed IRAs.
Save on Custodian Fees: Unlike a Self Directed IRA, the 401(k) investor may act as the plan “custodian,” or trustee of the plan assets, thus saving on the fees charged by custodians. Generally, this is advisable only more sophisticated investors and many investors will find the fees charged by custodians a good value. However, an active investor can save significant sums by acting as his plan’s trustee.
No Unrelated Business Income Tax (UBIT): In an IRA, income from property purchased with financing in an IRA will be subject to UBIT. (Moreover, the loan must be non-recourse and the named debtor must be the IRA itself to avoid a prohibited transaction) The portion subject to UBIT will be the percentage of the total purchase price that was financed. However, when properly structured in a 401(k), even income from the financed portion of real estate can be tax exempt (i.e., not subject to UBIT).
Full Asset Protection:
401(k) plans enjoy greater protection from personal creditors than do IRAs. Personal creditors can pursue IRA assets in most states, and the IRA owner must file for bankruptcy protection to protect his IRA assets. In bankruptcy IRAs are exempt from personal creditors up to $1 million. Amounts over $1 million are subject personal claims. In contrast, 401k plans are exempt from creditors both in and out of bankruptcy and there is no cap.
Borrow from a 401(k): IRAs cannot loan money to their owners (although a defacto loan of 60 days can be made using the rollover time limit). In contrast, 401(k) plans can lend up to $50,000 for up to 5 years.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.