Fayetteville, NC (PRWEB) December 21, 2011
The December 14 edition of USA Today included a letter headlined, ?Stay Away From 401(k)?. Jim Hitt, CEO of American IRA, shares his knowledge on this subject to let everyone know that a self-directed 401(k) is actually like a self-directed IRA on steroids!
Lots has been written about the tremendous benefits of the self-directed IRA. IRAs have terrific upsides for the investor, including tax deferral (for traditional IRAs), asset protection of up to $ 1 million under federal law, and higher in some states, and the flexibility to invest in a wide variety of assets not typically available in an employer?s 401(k) plan.
There?s one drawback to self-directed IRAs, though: They can?t contribute enough. At best, they can contribute $ 5,000 to an IRA, plus another $ 1,000 in catch-up contributions for those over age 50.
If they like the idea of taking control of their retirement assets with a self-directed IRA, though, then they?ll love the idea of doing the same thing with a 401(k).
Solo 401(k) Basics
About a decade ago, the financial industry responded to a lot of popular demand from sole proprietors and owner-operators of very small businesses ? often with just one owner and employee, or managed solely by the owner and his or her spouse, and introduced the Solo 401(k). This plan had all the same advantages of traditional 401(k) plans, but stripped down some of the administrative requirements to make them realistic for very small companies.
If they are a small business owner with some free cash flow, they can invest far more in a Solo 401(k) ? self-directed or otherwise ? than they can in an IRA. Specifically the 2012 pre-tax contribution limit for Solo 401(k) plans is $ 17,000, plus another $ 5,500 for contributors over age 50, compared with a maximum of $ 5,000 ($ 6,000 for those over age 50) for IRA investors. Furthermore, there is no income threshold to meet when it comes to contributing to a Solo 401(k). They can contribute to a Solo 401(k) no matter how much income they earn. And if they are the only employee, there are no ?top hat? concerns they need to worry about that would restrict their contributions if some of their employees didn?t contribute. Their contribution ensures they have a participation rate of 100 percent!
Depending on the circumstances, and whether they are an owner-employee of their own corporation or whether they are technically self-employed, they may be able to contribute even more in a Solo 401(k) than to a SEP-IRA, because of the way self-employment taxes are calculated.
Self-Directed Solo 401(k)s
Because they own the company, they can also set up the plan the way they see fit ? and draw up the plan rules to suit their own style of investing and their own expertise. Many small-business owners don?t realize that by using a self-directed Solo 401(k), they can avail themselves of the same flexibility and investment choices as they can get in a self-directed IRA.
This means that they can use their Solo 401(k) to invest in any of these investment options on a pre-tax basis:
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