Solo 401(k) vs Self-Directed IRA

Updated: Sep 18, 2019

Self-directed retirement accounts are becoming more and more popular because people want to have more control over their retirement account. They want to be able to have more flexibility and more options when it comes to their retirement accounts. A self-directed retirement account basically just means that you have the ability to self-direct your own funds.

· If you want to invest inside the stock market, you can.

· If you want to invest in real estate, you can do that, too.

· If you want to invest into private companies or precious metals, you can.

You have a lot of different investment options with a self-directed retirement account. Now, with a self-directed retirement account, you can have a self-directed IRA or a self-directed 401(k).

Those two self-directed retirement vehicles function a little bit differently. Let's talk about the self-directed IRA. This is just a good old-fashioned IRA. Only difference is it has this self-directed component where you have more investment options, such as real estate.

Self-Directed IRA

So, money in a self-directed IRA is protected from bankruptcy. You can contribute up to $6,000 to $7,000 per year of new money into a self-directed IRA. Money that you take out from an IRA, typically, you're penalized unless you replace the money you withdrew within 60 days.

And as I've mentioned, you can invest outside the stock market, like real estate, precious metals, insurance, and more.

Now, a self-directed 401(k), how is that different from a self-directed IRA? Couple of differences. Number one, money in a self-directed 401(k), also known as a Solo 401(k), they're they same, is protected from bankruptcy, creditors, and lawsuits.

Self-Directed 401(k)

In a self-directed 401(k), aka Solo 401(k), you can contribute anywhere from $56,000 to $62,000 per year of new money contributions. A big difference between this plan and a self-directed IRA is that you can take money out of the self-directed 401(k) without paying the penalties. And just like the self-directed IRA, the self-directed 401(k) allows you to invest outside the stock market.

What’s the difference?

Both of these accounts have similar investment options. The first big difference is you can take money out of the self-directed 401(k) without paying the penalties. So there's a lot more flexibility as far as taking money out with the self-directed 401(k) versus a self-directed IRA.

Second big difference is this one right here. On a self-directed 401(k), you can contribute around $60,000 a year of new money into a self-directed 401(k), whereas a self-directed IRA, you can only contribute anywhere from $6,000 to $7,000 per year. So if you're trying to put as much money as you can into a self-directed 401(k), obviously you have a lot more wiggle room with this account, right.

Think about if you put $60,000 a year into a self-directed 401(k) and you did that for five years straight, that's what? $300,000 over five years that you're able to stash in this self-directed 401(k), and now you can use that $300,000 to invest where you want. All right. You're not able to contribute a whole lot of new money into this IRA, right, over five years, $6,000, $7,000 a year.

We're talking what? $30,000, $35,000 a year you can put into this plan over five years, where you can put up to $300,000, give or take, over the next five years, right. And then there's more protection options with the Solo 401(k), right. You're protected from creditors and lawsuits. Here, you don't have those protections with the IRA.

So, again, both of these accounts, they're very, very similar in how you can invest the money, but if it comes down to higher contribution limits or being able to pull some money out without triggering the penalty, the taxable event, you're going to want to know the difference between a self-directed 401(k)and a self-directed IRA.