Self-Directed Individual Retirement Accounts (SDIRAs) are available to most working individuals because the main stipulation is to have earned income (i.e. - traditional W-2 employees) compared to income from self-employment (independent contractors or business owners). You can open a starter Self-Directed IRA from scratch and begin contributing if you have earned income, or you can choose to consolidate other Traditional, Rollover, Roth, or similar “old” 401(k)’s with past employers into similarly titled Self-Directed IRA accounts.
The primary advantage of a Self-Directed IRA over a typical IRA is that it allows you to invest the way you want in things that you know such as real estate and other alternatives.
The tax advantages are more limited and less pronounced when compared to a Self-Directed Solo 401(k).
The following chart outlines some of the major differences:
*Please note that phase-out limits apply to Roth IRAs.
Some key takeaways from reviewing the chart:
A Self-Directed Solo 401(k) has the potential to provide greater tax benefits because of larger contribution limits.
The Self-Directed IRA can be very effective once an individual has accumulated a large balance (typically from the rollover of a 401(k)) and seeks to further diversify.
The cost of administering a Self-Directed IRA is generally more because a custodian is required.
A Self-Directed 401(k) may provide more liquidity because of the loan option.
A Self-Directed IRA may not be as effective from a tax perspective because UDFI applies.
Both plans require nonrecourse loans to be used when purchasing real estate.
Your Partner Throughout the Process
Nashional Self-Directed is a retirement plan provider and does not act or serve as a custodian. We have an affiliate relationship with an unrelated third-party custodian that we have selected to provide Self-Directed IRA accounts to our clients. For more information, please contact us so we can discuss your situation and determine if a Self-Directed IRA is right for you.