A self-directed 401k puts you in the driver's seat.
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A self-directed 401(k) can be opened by self-employed sole proprietors or may be offered by an employer.
This type of 401(k) plan empowers participants with a wider range of investment options than what is typically seen with 401(k)s. Rather than choosing pre-designed packages, you can select your own stocks, bonds, and mutual funds, and invest in unconventional assets like commodities, tax liens, and real estate.
While self-directed 401(k)s offer great flexibility and choices, there are still some limits and prohibited transactions. As a 401(k) plan provider and administrator, Ubiquity can help you navigate the world of self-directed 401(k)s, whether you’re a self-employed individual or a participant in an employer-sponsored plan.
Like a traditional 401(k), the self-directed 401(k) allows workers to save for retirement while deferring income taxes on their contributions and earnings until withdrawal. Penalty-free distributions can be taken as early as 59.5 or as late as 72.
Employees can invest up to $22,500 in their retirement savings in 2023. Employers can also make contributions to bring employee account balances up to a maximum of $66,000 per year. Savers who are age 50 or older can contribute an extra $7,500 in catch-up contributions.
What makes self-directed 401(k)s unique is the ability to invest in real estate, notes, foreign currency, precious metals, and private businesses. By contrast, most employer-sponsored 401(k)s are drawn up to only allow the choice of pre-approved stocks, bonds, mutual funds, and CDs.
When employers agree to sponsor a plan, they act as fiduciaries of the plan, which brings a set of legal liabilities for the plan’s overall performance. If the employer convinces employees to spend on poor investments where everybody loses money, plan participants could sue the business. For this reason, employers may try to steer investors away from riskier choices, though the recommended investments may also not reap as many gains.
If you are self-employed, you can open a self-directed solo 401(k) for yourself and make contributions as both the employee and the employer. As the employee, you can put up to $22,500 into a Solo 401(k). As the employer, you can invest an additional 20 or 25% (depending on your business entity status) up to the maximum of $66,000 for 2023. If you’re age 50 or older, you can put in another $7,500.
With a solo 401(k), you’ll enjoy full investment choice and total checkbook control, so it’s as easy as writing a check or making a debit from your plan account to invest in everything from real estate and tax liens to precious metals and foreign currency to stocks and bonds. You can act as trustee and participant if you desire, or you can ask Ubiquity to manage contributions, loans, distributions, and IRS filings.
If you are seeking next-level investing, then the self-directed plans offer exciting choice and flexibility. It’s possible to delve into a self-directed 401(k) with the assistance of a plan provider, financial consultant, certified professional accountant, tax attorney, broker, or fiduciary who has pledged to act in your best interest and provide sound financial advice.
If you’re exceedingly busy or new to investing, you may not want the responsibility of managing a complex mix of funds in a self-directed 401(k) plan. For many people, the prepackaged options are good enough to start seeing returns and compounding interest.
Making a prohibited transaction can cause all your investments to suddenly become taxable, resulting in a hefty bill, so you’ll want to be sure you’re aware of what is or isn’t allowed with a self-directed 401(k) account.
If you earned taxable compensation during the current year, you are eligible to open a self-directed 401(k). If you work for yourself, you’ll need to set up a business entity: a sole proprietorship, an LLC, an S-corp, or a C-corp. Then a retirement plan provider can create plan documents and file them with the IRS.
If you have other monies in IRAs or 401(k)s, you can roll them over. Then you are free to invest as you see fit. With an online 401(k) provider, the whole process can be completed in as little as 15 minutes.
Ubiquity specializes in easy, affordable, web-based retirement plans geared toward the self-employed and small businesses. For more than 20 years, we’ve led the industry with low-cost, flat monthly rates on 401(k) plans, with no hidden fees based on the size of your balance or company. Additionally, we offer live customer support, optional form-filing services, and hassle-free conversions to full-service plans.
We have helped over 100,000 savers contribute more than $3 billion since 1999. Contact us to take your retirement planning to new heights.