I am asked often why I encourage clients to pursue establishing a self directed 401k plan. To put it quite simply, it is best plan available for the self employed.
If you can qualify for a self-directed 401(k) plan, you will enjoy more flexibility, lower overall costs, and the freedom to have real control over your retirement plan. You can choose which account to fund: your before tax contribution or your after tax Roth account contribution, without the income limitations imposed by IRAs.
You do not have to use a custodian or third party administrator, and that can save you thousands of dollars in custodial fees over the life span of your plan.
And, you can borrow directly from your self directed 401(k) plan, pay yourself interest, and use that money for virtually any reason (subject to IRS requirements and provisions).
Here is a brief overview of the main differences between these two types of plans.
| Features | SDIRA | Individual 401(k) |
| Contribution Limit (2009, thereafter adjusted for inflation in $500 increments, or as otherwise stipulated by the IRS) | $5,000 to age 49, $6,000 age 50 and above | $16,500 ($16,500 age 50 and above) pre-tax contribution and a total of $46,000 allowed between employee election and company contributions and/or profit share |
| Employer Matching Contributions | Not Allowed | Your business can match 100% of employee deferrals |
| Profit Sharing Allowed | Not Allowed | Your business can profit share in addition to, or in place of, matching contributions |
| Roth Provisions | A separate Roth account must be established and will have its own additional custodian costs | A separate Roth account can be established and will have its own additional bookkeeping requirements – no additional custodial costs |
| Roth Contributions | Contributions can be very limited – $5,000 in 2008 but not allowed when AGI is above $116,000 single or $169,000 joint | Up to $15,500 after tax, with no income caps: employer contributions and profit share must be pre-tax however |
| Roth Rollovers | rollovers allowed from one plan or custodian to another | Rollovers generally not allowed, however, at retirement, 401(k) will allow rollover to individual Roth IRA |
| Roth Conversion | Conversions from traditional IRA to Roth IRA are allowed without limitation in 2010! | Not allowed |
| TAXATION – UBIT/UDFI (Unrelated Business Income Tax/ Unrelated Debt Financed Income Tax) | UDFI applies to leveraged transactions | UBIT applies but with certain exemptions. UDFI does not apply to leveraged real estate |
| Purchase Shares in a “S” Corp | Not Allowed | Allowed |
| Government Reporting Requirements | Recommended | Yes, more specifically form 5500-EZ is an annual requirement, other reporting may be required depending on investment choices |
| Loan Provisions | Not Allowed | Allowed, with certain pay back requirements and specific limits on amounts available |
| Tax Credits for low-income individuals | Not Allowed | Allowed, up to 50% of first $2,000 with certain income limits (see IRC § 25B) |
| Lease-back property purchased by plan | Not Allowed | Allowed, but with certain occupancy limits |
| Purchase of business | Allowed, but no “s” corps | Allowed, UBIT will apply outside of any exemptions |
Imagine having the ability to save up to $16,500 after tax into the Roth account in your pension plan. Your growth, distributions, and death benefit are all tax free.
If you believe taxes will be rising over the course of your working career, paying taxes now and receiving tax free income in retirement is going to serve you and your very family well.
For more information contact the author at info@sdira401k.com
About the Author:
Roger P. Simard is the founding principal of Genesis Financial and Real Estate Services, LLC, Genesis Financial Advisors, LLC, and Genesis Tax Advisors, LLC. He heads the firm’s corporate and personal financial planning practice and oversees all operations. Mr. Simard concentrates his work in the fields of financial planning, real estate investing, tax planning, and portfolio management. Mr. Simard is a Certified Financial Planner™ and has over 19 years of experience helping individuals and businesses achieve financial success. Mr. Simard was a speaker for The Prudential Spirit of Community Awards, a nationwide youth recognition program honoring secondary school students for outstanding service. He is a frequent speaker and radio guest on business and taxation issues and successful investment strategies and has been quoted in the Personal Real Estate Investor Magazine.
Tags: 401(k), financial planning, Investment, investment risk, IRA, rental real estate, Retirement, tax deductable, tax deductions