A Self Directed 401K, is a 401K plan setup for your company. As the Manager of the company, you can act as the Trustee for the Plan's monies. Like a self directed IRA, the Self Directed 401k enables you to self direct your investments, but in this case it is on behalf of your 401K. The investments can be in real estate, other companies, private placements, physical gold and silver, or your own C-Corp. The use of this type of structure enables you to have investment and checkbook control over the 401K and eliminates custodian involvement and hassles, regardless of the investments.
The most common Self directed 401k plan that we create for our clients is a solo 401k. A solo 401k is a 401k in which there in only one participant (husband and wife are considered one person). A solo 401k has also been called a Solo-k, Uni-k, or one participant k. The rules for a solo 401k are the same as any other 401k with one exception which will be discussed in the article.
Contributions to a 401k come in two parts: employee contributions and employer matching contributions. An employee can contribute for 2013 and 2014, $17,500 or $23,000 if age 50 or older.
The employer (company) can contribute up to 25% of compensation as described by the plan. If you are self employed you must use a special computation to figure out how much the company can match. The self employed income must be “earned” income. The computation can be found in chapter 5 of IRS Publication 560
Total contributions to a participant’s account, not counting catch-up contributions, cannot exceed $51,000 for 2013 and $52,000 for 2014.
Below is an example taken from the IRS website on the amount of funds that can be put into a solo 401k:
“Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2013. He deferred $17,500 in regular elective deferrals plus $5,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2013 were $35,500. This is the maximum that can be contributed to the plan for Ben for 2013.”
If Ben had earned $100,00 in W-2 wages then the company could have matched $25,000 (25% of $100k) in employer matching contributions.
Solo 401k Rules
Self directed 401k that are a one participant plan do not need to go through the same testing requirements as 401k’s with multiple employees. If you do not have any employees then the business owner is not required to perform nondiscrimination testing for the plan. This is because there are no employees to discriminate against.
In addition, the 401k would need to file an annual 5500ez if the value of the 401k is over $250,000. If the value is under $250,000 then no filing requirements are required for the 401k.
A self directed 401k can be a great way to maximize your retirement planning while minimizing your tax burden with the IRS. By combining the benefits of the high contributions limits to a self directed 401k with self direction you can dramatically increase your retirement portfolio through the great returns you can get. It is also a great way to diversify your retirement portfolio as well. There are plenty of reasons why a self directed 401k is a great option.
If you are interested in learning more about a self directed 401k feel free to contact us today.
Author: Nick Barker