O TYM ODCINKU
Which is better for you: A self-directed IRA or a self-directed 401(k)? Today, you learn the first big distinction to help you answer that question in the best possible way for you. I am Bryan Ellis. This is episode #314 of Self-Directed Investor Talk.
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Hello, self-directed investors, all across the fruited plane! Welcome to Episode #314 of Self-Directed Investor Talk, the SHOW OF RECORD for savvy self-directed investors like YOU where each day, I help you to find, understand and PROFIT from exceptional alternative investment opportunities and strategies.
I, of course, am your sometimes opinionated, always accurate and consistently lovable host, Bryan Ellis. This episode – for which you can find all of the links and resources at SDITalk.com/314 – is the second installment of our “Choosing the Right Tool” series, where we’re looking at whether an IRA or a 401(k) is the right answer for you as a self-directed investor.
Now in the last episode I did share with you some circumstances under which you need not have EITHER type of self-directed account. I won’t rehash those other than to say that you MUST have one or both of earned income from a job/employer and/or you’ve got to have money in an existing IRA or 401(k) to transfer into the account. In other words, you’ve got to have an allowable way to get money into the account. The details are in installment #1 of this series, to which I’ve linked on today’s show page at SDITalk.com/314.
If you’ve been a long time listener of SDI Talk, first of all – THANK YOU for being a long time listener! – but if that describes you, you probably already know that I have a very, very, very strong preference for using a 401(k) over an IRA whenever possible.
To be clear, both tools have their place. But to my way of thinking, and for some reasons I’ll share with you now, if you’re investing in non-Wall Street assets, you should have a bias towards using a 401(k) rather than an IRA if that’s an option for you.
Now way back in the beginning of this show, Episode #3 – literally five years ago – I did a whole show that showcases rather clearly 7 big reasons that a properly structured 401(k) is vastly superior to a self-directed IRA. You’d do well to check that out, and I’ve linked to it from today’s show page at SDITalk.com/314.
But a quick recap of just SOME of the reasons – there are far more than just 7 – that you should use a 401(k) if you can are as follows:
1. You can contribute FAR MORE MONEY to a 401(k) than to an IRA
2. You and your spouse can contribute money to the same plan, thus POOLING your capital and making it easier to do bigger deals.
3. 401ks’ offer SUBSTANTIALLY better protection against creditors and lawsuits than IRA’s
4. Checkbook-like control of your investment capital is built into properly structured 401(k)’s. For IRA’s, on the other hand, that level of control is expensive, tedious and risky to establish.
5. If you’re using an IRA and you break the IRS rules about handling your account, you’re out of luck. It’s going to be very painful and there’s nothing you can do to fix it. Not so with 401k’s, that provide a clear path to correcting errors.
6. You can’t BORROW money from your own IRA, but you can from your own 401k!
7. A 401k includes BOTH Traditional and Roth subaccounts… you get both types in one 401k plan, which creates astounding flexibility not available in an IRA.
Again, there are MANY more reasons that I firmly endorse the use of a 401(k) over an IRA for any self-directed investor who qualifies for both. Issue #5 – the one about committing prohibited transactions – if that was the only difference, that would be more than enough. But the reasons are far more extensive than that.
But that caveat I mentioned: That you should use a 401(k) over an IRA if you qualify for both… it’s the question of qualification that’s our first determining factor, and that leads to the one, and I believe only, way in which IRA’s are superior to 401k’s.
That way is that nearly anybody who has a job or an existing retirement account can qualify to set up a self-directed IRA. There’s just not a lot required beyond having a source of earned income.
Not so with 401(k)’s. The requirements aren’t huge, but they’re notable. Here they are:
First, you have to be owner or partial owner of a business.
Second, that business have to make real income. It doesn’t have to be a lot of income, and it doesn’t even have to be profitable, but it does have to earn income.
Third, if your business has any full-time employees other than you, your partners and your spouses, then you’ll need to use a normal self-directed 401(k). But if the only full-time employees of your business are the owners and their spouses, then you can use the solo 401(k), which is the same thing but intended for smaller businesses.
So that’s it. You’ve got to own a business that makes money, even if it isn’t profitable. That’s basically what it takes to qualify to set up a self-directed 401(k) plan.
Again, my strongest advice to you is this: If you qualify to use a self-directed 401(k) plan, you almost certainly should do that rather than using a self-directed IRA plan. Again, check out Episode #3 of this show – which is linked on today’s show page at SDITalk.com/314 – for more information that compares 401k’s to IRA’s.
Here’s the good news and the bad news about 401k’s: They can be relatively simple and inexpensive to set up, but they are NOT all the same… and sometimes, the differences are REALLY severe. I’ll do an episode sometime in the future to help you see how stark those differences can be. But in the mean time, if you’d like to set up a self-directed 401k and want a referral to someone who can do that for you and do it exactly right the first time, just drop an email to me at feedback@sditalk.com and I’ll be happy to get you connected.
Now, having clarified the general superiority of 401k’s over IRA’s, that still leaves us with a big question: If you only qualify for an IRA and not a 401k, which TYPE of IRA should you use? Because it turns out there are a LOT of variation with HUGE differences! We’ll dig into that question in the NEXT episode of our Making The Right Choice series here on SDI Talk, so stay tuned!
My friends… invest wisely today, and live well forever!
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