Self-Directed IRA Versus Solo 401(k)

Photo of a crossroad in a forest with the text "Self-Directed IRA Versus Solo 401(k)."Many self-directed investors have the option of choosing between a self-directed IRA or a self-directed solo 401k. Both accounts can be self-directed so that you can invest into any investment allowed by law such as real estate, LLCs, precious metals, or private company stock. However, depending on your situation, you may choose one account type over the other. What are the differences? When should you choose one over the other?

 IRA Solo 401K
Qualification Must be an individual with earned income or funds in a retirement account to rollover. Must be self-employed with no other employees besides the business owner and family/partners.
Contribution Max $5,500 max annual contribution. Additional $1,000 if over 50. $53,000 max annual contribution (it takes $140K of wage/se income to max out). Contributions are employee and employer.
Traditional & Roth You can have a Roth IRA and/or a Traditional IRA. The amount you contribute to each is added together in determining total contributions. A solo 401(k) can have a traditional account and a roth account within the same plan. You can convert traditional sums over to Roth as well.
Cost and Set-Up You will work with a self-directed IRA custodian who will receive the IRA contributions in a SDIRA account. Most of the custodians we work with have an annual fee of $300-$350 a year for a self-directed IRA. You must use an IRS preapproved document when establishing a solo 401k. This adds additional cost over an IRA. Our fee for a self-directed and self-trusteed solo 401(k) is $1,200.
Custodian Requirement An IRA must have a third party custodian involved on the account (e.g. bank. Credit union, trust company) who is the trustee of the IRA. A 401(k) can be self trustee’d, meaning the business owner can be the trustee of the 401(k). This provides for greater control but also greater responsibility.
Investment Details A self-directed IRA is invested through the self directed IRA custodian. A self-directed IRA can be subject to a tax called UDFI/UBIT on income from debt leveraged real estate. A Solo 401(k) is invested by the trustee of the 401(k) which could be the business owner. A solo 401(k) is exempt from UDFI/UBIT on income from debt leveraged real estate.

Keep in mind that the solo 401(k) is only available to self-employed persons while the self-directed IRA is available to everyone who has earned income or who has funds in an existing retirement account that can be rolled over to an IRA.

Conclusion

Based on the differences outlined above, a solo 401(k) is generally a better option for someone who is self-employed and still trying to maximize contributions as the solo 401(k) has much higher contribution amounts. On the other hand, a self-directed IRA is a better option for someone who has already saved for retirement and who has enough funds in their retirement accounts that can be rolled over and invested via a self-directed IRA as the self-directed IRA is easier to and cheaper to establish.

Another major consideration in deciding between a solo 401(k) and self-directed IRA is whether there will be debt on real estate investments. If there is debt and if the account owner is self-employed, they are much better off choosing a solo 401(k) over an IRA as solo 401(k)s are exempt from UDFI tax on leveraged real estate.

Choosing between a self-directed IRA and a solo 401(k) is a critical decision when you start self-directing your retirement. Make sure you consider all of the differences before you establish your new account.

Who Should I List as Trustee of My Trust?

Photo of someone handing a child a brass key with the text "Who Should I List as Trustee of My Trust?"If you are establishing an estate plan, it is likely that you will have a Revocable Living Trust (“Trust”) as the primary document that outlines who will receive your assets upon your death and what conditions, if any, will be placed on those assets. As many persons are aware, a Trust has numerous advantages over a will because upon the death of the owner(s) of the Trust, the surviving trustee of the Trust will have control and authority to distribute the estate of the deceased person without having to go to probate court. A will, by contrast, typically must receive Court approval and distribution of the assets occurs only after going through probate court and getting orders from the Court. The probate process of a will is expensive, time consuming, and is part of the public record.

When establishing a revocable trust you will be outlining your assets and who will receive those assets upon your death. You will also outline certain conditions that may be placed on your assets. For example, you may state that your children will receive an equal share of your estate upon your death and the death of your spouse but your children shall not receive a distribution if they have a drug or alcohol addiction or if they have a creditor who would cease the funds. The trust may also restrict distributions to minor children so that they don’t receive a large inheritance when they are 18.

Trustee Selection

One of the most significant decisions you will make when you establish your Trust is who will be the Trustee of your Trust upon your death. In most situations, you will be the trustee during your lifetime and if you have a spouse your spouse will be trustee if they survive you. However, you will need to select a successor Trustee of your Trust who will manage your estate following your death (and the death of your spouse, as applicable). This successor Trustee may be a family member, friend, bank or trust company, or an attorney or other professional. When determining who should be your Trustee, you should consider the following issues and factors.

  1. What Will the Trustee Do? The Trustee will need to undertake the following tasks.
    1. Typically will make funeral and burial arrangements along with family members (generally the Trust pays for these things).
    2. Inform family members and heirs of the estate plans of the deceased.
    3. Will pay off creditors and hire professional as needed to assist with the estate (accountants, attorneys, real estate agents, etc.).
    4. Determine assets. They will need to know the assets of the deceased in order to ensure that they are distributed to the heirs/beneficiaries of the Trust.
    5. Organize assets for distribution. This may include listing and selling real property. It will likely include coordinating the distribution of bank accounts and insurance policies. It will also include organizing and distributing personal effects (e.g. jewelry, furniture, art, personal effects). And finally, it may include the winding down, sell, or transfer of businesses.
  2. Size of the Estate. Most Trusts will list a family member as the Trustee of the estate and for estates of a couple million dollars or less this is generally  a good fit. However, for estates over $3M you may want to consider listing a professional (attorney or law firm) as the successor trustee of your estate and for estates over $10M you may want to consider listing a trust company or bank as the trustee of your estate. Large estates can overwhelm a family member who has never handled such matters before and having a professional with experience can go a long way. The Trust will need to pay for these services (generally in the tens of thousands of dollars) so it isn’t typically advisable for smaller estates unless there is no other adequate family member of friend available.
  3. When to List Non-Family? If you have heirs/beneficiaries who are likely to disagree and cause contention, you may want to list a non-family member or a friend as the Trustee so that a third party can make decisions and so that you can avoid potential contention and litigation over your estate.
  4. Financial Expertise of the Trustee. If you are selecting a family member, choose one who has shown good financial skills over their life. If you’re selecting a child over another, consider their financial expertise, work background, location, and family dynamics in selecting one child as Trustee over another. Also, choose someone who is well organized and who is task oriented. The Trustee will have many things to accomplish and you want someone who will take care and responsibility for these things.
  5. Family Dynamics. All families are different and all situations are unique. As a result, you may select a brother or sister as your successor Trustee instead of choosing a child or other family member. This may be because your children are younger or because a sibling is better equipped to handle the administration of your estate.
  6. Trustee Compensation. If you are listing a family member as Trustee, they typically will serve without compensation but will be reimbursed for any expenses they incur while serving as Trustee. You may compensate them or give them something extra from the estate for taking on the responsibility but generally family members are listed to serve without compensation.
  7. Can an Heir/Beneficiary be a Trustee? Yes, you may have a beneficiary/heir serve as Trustee and this is very common. In fact, most persons who have adult children will list a child as the successor Trustee and this person will also typically be a beneficiary/heir. While there is some conflict of interest in this arrangement, the Trustee is bound to the terms of the Trust and can’t abuse that discretion for their own personal benefit.
  8. Should I Appoint Co-Trustees? Some persons will consider listing co-beneficiaries as successor Trustees. Typically, this is done as a way to involve more than one family member in the distribution of the estate so that one person doesn’t feel left out. While there can be some benefits to involving another person as Trustee (e.g. sharing the workload, combining skills of persons listed) it can cause contention and confusion as to who is doing what so be specific about their authority and responsibility if you are listing multiple trustee.
  9. Who is Most Commonly Listed as Trustee? Most persons with adult children will list one of their children as successor Trustee. Most persons with younger children will list a sibling or close friend as their successor Trustee.

Your Trustee has an important and critical task in managing your estate following your death. Choose wisely as they will need to make critical decisions that will effect your loved ones.