If you’re a solopreneur, planning for retirement looks a little different than it does for those in the corporate grind. No employer-sponsored 401(k) means you’re on your own to create a retirement savings strategy. But you do have powerful options—namely, a Self-Directed Solo 401(k) or Self-Directed IRA.
The one you choose depends on your financial goals, income, and how much control you want over your retirement funds. We’re breaking down what makes these two account options valuable. Compare how Self-Directed Solo 401(k)s and Self-Directed IRAs stack up to secure your path to a comfortable retirement.
IRA, 401(k) ... Retirement planning seems like it’s full of confusing acronyms, but these have the power to transform your future. And if you’re a small business owner, you have special plans to choose from, so take the time to understand your options:
The beauty of a Self-Directed Solo 401(k) is that it’s tailor-made for self-employed individuals who operate alone or with only their spouse (who can also receive benefits). The owner finds, buys, sells, and manages all assets and retirement funds as the administrator, retaining substantial control.
And if that wasn’t enough, a Self-Directed Solo 401(k) is also tremendously flexible, offering access to a wide range of investments, including real estate, private equity, and precious metals. Investors (non-business owners) can choose between a Traditional or Roth account for tax-free growth on after-tax contributions.
Looking for a bit more flexibility? A Self-Directed IRA (SDIRA) is available to anyone—the only requirement if you want to make contributions to the account during the current calendar year is that you’ve earned income.
This type of account offers tax-deferred growth in Traditional IRAs or tax-free growth in Roth IRAs. Similar to a Self-Directed Solo 401(k), opening a Self-Directed IRA also offers investment flexibility by allowing nontraditional assets, such as real estate, private loans, and more.
But be mindful to play by the book. This type of account requires careful adherence to IRS rules regarding prohibited transactions, so you can’t:
Choosing the best option depends on your unique circumstances and goals. Weigh the differences surrounding three key elements: contributions, flexibility, and taxes.
“How much can I invest?” The answer depends on your account type.
A Self-Directed Solo 401(k) allows you to take on two different roles—as both the employee and employer—and make corresponding deferrals and employer profit-sharing contributions. Such freedom allows for much higher total contributions, creating one of the most powerful retirement savings vehicles for small business owners.
That said, you still have to follow specific rules:
In a similar vein, Self-Directed IRAs also have specific dollar contribution cutoffs for each calendar year. These accounts have lower annual contribution limits compared to Solo 401(k)s:
If diversifying your portfolio is important, you have options. A Self-Directed Solo 401(k) supports alternative assets, such as real estate, private lending, and precious metals. However, these plans come with additional administrative requirements because they’re self-directed. That means you do all the recordkeeping.
Fast fact: IRAR Is the only company that provides a platform to make this easy. Most companies provide either an expensive service or a spreadsheet.
Self-Directed IRAs also provide flexibility, enabling investments in real estate, tax liens, private businesses, and more. But take care to follow IRS rules, such as avoiding prohibited transactions involving disqualified persons.
The investment plans you select matter greatly come tax time. Both Solo 401(k)s and Self-Directed IRAs are available as Traditional or Roth accounts, but they’re nuanced in their tax treatment flexibility.
Self-Directed Solo 401(k) contributions create a sort of chess game. Enjoy lower taxable income now and get taxed on withdrawals in retirement (Traditional), or pay taxes up front and take withdrawals in retirement tax-free (Roth). One perk to note? Regardless of the plan type, you can borrow up to $50,000 to create a safety net for emergencies.
Self-Directed IRAs are also a mixed bag. Traditional and Roth IRAs offer tax-deferred or tax-free growth, respectively. These accounts grow tax-free until distribution after age 59½, allowing income, profits, and appreciation to accumulate without impacting current taxable income.
Your choice—from the paperwork to its financial potential—should fit like a glove. Do you check more boxes for a Self-Directed Solo 401(k) or SDIRA? Don’t overthink—just break it down into three elements:
It bears repeating that a Self-Directed Solo 401(k) is restricted only to self-employed individuals or small business owners and their spouses, so if you don’t fit into this group, your choice has already been made. Instead, you’ll want an SDIRA to accommodate your goals.
How hard will it be to manage? Because the investor is in charge of driving the account, a Self-Directed Solo 401(k) requires administrative work, including potential annual filings (e.g., Form 5500 for plans above a certain asset threshold). If you don’t want that responsibility, an SDIRA may be a better fit because of its reduced administration and reporting requirements.
Thinking beyond stocks and bonds? Consider the alternative investments you plan to include. Both accounts allow investments in real estate, private equity, and precious metals, but with a Self-Directed Solo 401(k), you act as the employee and employer—and can contribute both ways.
Where’s the business headed? Your present and future business positions play a role in how you approach retirement investments.
Whether you’re “making bank” or just scraping by must necessarily inform your investment choices. The higher your income, the more likely you are to be able to maximize your retirement savings, making the elevated contribution limits of a Self-Directed Solo 401(k) appealing.
Assess what your income can support. If applicable, evaluate how perks such as salary deferrals and profit-sharing contributions could impact retirement savings based on your current earnings.
If you plan to expand with additional employees, think bigger with your investment accounts. Because a Solo 401(k) is intended for sole proprietors and small business owners without employees, other IRA retirement accounts may be more suitable, such as:
Your business is a long game, and retirement is the reward. Ensure a balance between maximizing contributions and maintaining liquidity for business growth and personal investments. As you choose between a Self-Directed Solo 401(k) and a Self-Directed IRA, think about how each aligns with your projected future income and business expansion.
At the end of the day, both a Self-Directed Solo 401(k) and a Self-Directed IRA are powerful tools for building retirement wealth. But your account is like a road map and must point to your end destination—retirement. Whether you’re looking for higher contribution limits, increased investment flexibility, or a simpler setup, your selection should match your long-term financial goals.
Still unsure which way to turn to plan your retirement? Reach out to IRAR—we’ll guide you to the ideal retirement strategy.