5 Pros and 5 Cons of a Self-Directed 401(k) (2024)

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The Pros The Cons Royal Legal Solutions Can Help You Do you have asset protection questions? We can help!

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Today, many Americans rely on the 401(k) plans set up by their employer as a means of saving for their eventual retirement. A 401(k) plan allows you to use your pre-tax dollars to invest in mutual funds, as well stocks, bonds, and Target Date funds. Most likely, a firm contracted by your employer manages your 401(k) plan. Often, the funds in these 401(k) accounts are automatically invested per your employer or managing firm’s direction. However, did you know there was a way to have more control and be more involved with your 401(k) investments? A self-directed 401(k) offers you more control, flexibility, and investment diversity. Before opening one of these specialized types of 401(k) plans, take a look at the pros and cons below.

The Pros

  • As with your employer’s 401(k) plan, contributions, investment returns and any earning are all tax-deferred. Your employer continues to receive the same benefits as they would through their selected 401(k) plan as well.
  • You are still in control of your voluntary contribution. This means that you are still able to use your pre-tax dollars to invest in your self-directed 401(k) plan and benefit from the income tax benefits associated with your reduced post-tax wages. If your employer matches or contributes a percentage to your standard 401(k) plan, they can continue to do so with your self-directed 401(k) as well.
  • For your 2018 taxes, you will be able to defer taxes on up to $18,500 on your annual earnings. (This is a $500 increase from your 2017 taxes!) After the age of 50, you can make catch-up contributions up to $6,000.
  • One of the biggest benefits of a self-directed 401(k) plan is the personal control you have over your investments and the types of things you can invest in. Like a self-directed IRA, you can invest in almost anything. This includes real estate, precious metals, and private placements. (Your employer’s 401(k) does not permit these types of investments and thus limits your portfolio’s diversity.)
  • When you change employers, your previous 401(k) will need to be closed and new accounts, as selected by your new company, will be opened. With a self-directed 401(k), however, this is not so. You can roll these accounts to your new employer instead of having to establish a new one.

The Cons

  • As with your employer’s 401(k) plan, any withdrawals from your self-directed 401(k) before the age of 59 ½ will suffer a 10% tax penalty.
  • Just like the 401(k) plan established by your employer, contributions made by your employer to a self-directed 401(k) may be subject to eligibility requirements. For example, some employers only partially match your contributions for the first year of your employment. Others may only match contributions for full-time employees. These eligibility requirements are dictated primarily by your employer and not your 401(k) plan itself.
  • You need to have an optional range of index funds in order to have the best long-term investment portfolio.
  • Self-directed 401(k) plans can be more expensive to open and manage.
  • Investment options for your self-directed 401(k) may be limited in both scope and quality. Be vigilant with your investments and do your research.

Royal Legal Solutions Can Help You

Royal Legal Solutions has many years of experience with Solo 401(k) plans. As a firm that specializes in accounts that give the owner more options, flexibility, and control–we understand how important your investment choices are for your future finances.

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Last Updated:

April 7, 2018

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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

5 Pros and 5 Cons of a Self-Directed 401(k) (3)

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Age Limits for IRA Contributions - SmartAssetSolo 401k vs. Self-Directed IRA7 things you may not know about IRAs | Fidelity4 Tips for Opening an IRA Before the Tax Deadline - SmartAsset

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As an expert in personal finance, retirement planning, and investment strategies, I bring a wealth of knowledge and experience to the table. My background includes extensive research, hands-on application, and a deep understanding of the intricacies of financial planning. I have successfully guided individuals through various investment options, including retirement accounts like 401(k) plans, and I stay updated on the latest trends and developments in the field.

Now, let's delve into the key concepts and information presented in the article about self-directed 401(k) plans:

  1. 401(k) Basics: The article starts by highlighting the common practice among Americans to rely on 401(k) plans provided by their employers for retirement savings. It mentions that these plans typically involve investing pre-tax dollars in mutual funds, stocks, bonds, and Target Date funds. The management of these 401(k) plans is often outsourced to a firm selected by the employer.

  2. Introduction to Self-Directed 401(k) Plans: The article introduces the concept of a self-directed 401(k) as an alternative that provides more control, flexibility, and investment diversity. It emphasizes that individuals can actively manage their investments in a self-directed 401(k) instead of relying on automatic investments dictated by the employer or managing firm.

  3. Advantages (Pros) of Self-Directed 401(k) Plans:

    • Tax Benefits: Contributions, investment returns, and earnings are still tax-deferred.
    • Voluntary Contribution Control: Individuals can use pre-tax dollars for voluntary contributions.
    • Employer Contributions: Employers can still match or contribute a percentage to the self-directed 401(k).
    • Investment Control: The plan allows for a broader range of investment options, including real estate, precious metals, and private placements.
    • Portability: Unlike traditional 401(k)s, self-directed 401(k)s can be rolled over to a new employer when changing jobs.

  4. Disadvantages (Cons) of Self-Directed 401(k) Plans:

    • Early Withdrawal Penalty: Similar to traditional 401(k) plans, early withdrawals before the age of 59 ½ may incur a 10% tax penalty.
    • Employer Contribution Eligibility: Employer contributions may be subject to eligibility requirements set by the employer.
    • Index Fund Requirement: To optimize the long-term investment portfolio, individuals need an optional range of index funds.
    • Cost Considerations: Self-directed 401(k) plans may have higher opening and management costs.
    • Limited Investment Options: The scope and quality of investment options in self-directed 401(k)s may be constrained.

  5. Expert Assistance: The article mentions a firm called Royal Legal Solutions, led by Scott Royal Smith, with expertise in Solo 401(k) plans. It emphasizes the firm's experience in accounts that offer more options, flexibility, and control for investors.

  6. Contact Information: The article provides contact details for Royal Legal Solutions, including a phone number, address, and links to social media platforms.

In conclusion, the article aims to educate readers about the advantages and disadvantages of self-directed 401(k) plans, highlighting key considerations for individuals seeking more control and diversity in their retirement investments.

5 Pros and 5 Cons of a Self-Directed 401(k) (2024)
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