Self-Directed IRA or Self-Directed Solo 401(k)? Which should I pick?
The Self-Directed 401(k) may have great advantages for those with self-employed income. The Self-Directed IRA is the easiest to qualify for and report to the IRS.
What are the main differences between the IRA and Solo 401(k)?
Contribution limits. The IRA in 2019 is $6,000 and $19,000 for a solo 401(k). With an employer match, and Solo 401(k) can cap out at $56,000
IRAs are for individuals. Solo 401(k)s are tied to those who are self-employed
Solo 401(k)s do not need a custodian. They are tied to a trust and the employer entity.
How Roth works: Solo 401(k)s can have a Roth bucket in additional to a traditional bucket for different types of tax savings. However, they cannot accept Roth Rollovers. If you open an IRA, you need to pick or open two accounts. Traditional IRAs should only take pre-tax dollars and Roth should only take after-tax dollars, unless you are ready for a conversion and/or a taxable event.
You want to take borrow against your retirement account with a loan
You want very high contribution limits
You have steady self-employment income... but you don't have full-time employees other than your spouse
You are confident working by yourself or with your CPA and your own business to calculate contributions for yourself, your spouse, and your employer contribution or profit sharing
When should I stick with an IRA?
If you do not have any self-employment income
If you want to contribute to an account continuously, but your plan on hiring employees or your self-employed income will dry up soon. (You can keep an old Self-Directed Solo 401(k) open, but you can't contribute to it without new self-employment income.)
You want the utmost simplicity when it comes to reporting. You must manage contributions and might have to calculate profit sharing in a Solo 401(k). The Rocket Dollar Support team can assist you in making contributions and working with your account, but we are not tax advisors or CPAs
You don't need higher contribution limits
If you have old Roth accounts you want to roll over and consolidate. Unfortunately, the IRS does NOT let you roll over Roth accounts into a Solo 401(k) Designated Roth accounts. Here is the IRS rollover chart.