The Big Idea
Not all solo 401(k)'s are the same... and the differences can be very profound.
Points To Ponder
- A 401(k) is an employee-sponsored salary deferral and profit sharing plan. It can be both, one or neither of "Solo" or "Self-Directed"
- Solo 401(k)'s offered by stock brokerages tend to exclude all assets other than stocks, bonds and mutual funds.
- The law doesn't require a 3rd party custodian/trustee for your 401k, but some providers do
- Your plan will be more flexible as a trustee-directed plan than as an individual-directed plan... as long as you're the trustee!
- The expertise and availability of the provider of the solo 401(k) plan is the most important distinction
- Bryan's Recommendation: Talk with Tim Berry for a Solo 401(k) that meets all requirements
Hello, Self Directed Investor Nation! Welcome back to the podcast of record for savvy self-directed investors like you, where each day you learn how to Declare Independence from Wall Street and become better able to find, understand and profit from exceptional investment opportunities.
Hey folks I’ve got to say something very quickly, and that is:
Thank you. Thank you for listening. Sincerely, I’m grateful to you. I hope this show brings great value to you.
Ok, onward! Are all solo and/or self-directed 401k’s the same? Well, no, they’re not. For those of you who are contemplating the use of these extraordinary tools, you’ll want to pay close attention.
First, let’s distinguish. Solo 401k’s and Self-Directed 401k’s are not the same… and honestly, I’ve been using those terms interchangeably for a long time.
A 401(k) is just a salary deferral and profit sharing plan that can be provided to employees by an employer.
A SOLO 401(k) is exactly the same thing, but is available for use by companies with only one employee… namely, the owner, and sometimes the owner’s spouse too.
And a SELF-DIRECTED 401(k) is one in which the owner of the account gets to decide how the money is invested.
So, bottom line, a 401k can be one, both or neither of Solo or Self Directed.
Now that definitions are out of the way, I’d like to specify that what we’re focused on today is the SOLO SELF-DIRECTED 401(k)…
So, what’s the difference from one to the next?
Well, it’s true that they’re not all the same, but the differences can be subtle but profound. Those differences are a function of the associated plan documents, and of the provider who is facilitating the account.
The most basic difference is that, just like with self-directed IRA’s, not all “self-directed 401k’s” are created equally. You can easily set up a solo 401k at most of the major stock brokerage houses, and they’ll likely be called a “self directed” 401k, but the limits of your ability to self-directed will be the products offered by the stock brokerage – namely stocks, mutual funds and bonds. Alternative assets will be nowhere to be seen.
Another big difference from one plan to the next – even among the so-called self-directed IRA companies – is whether the plan requires there to be a 3rd party custodian. If you qualify to have a solo 401(k), the law requires that there be a custodian to handle the account… but it is not necessary for that custodian to be a 3rdparty. And in fact, serving as your own custodian is what gives you the greatest flexibility and the lowest cost, because you can be sure that if someone else is serving as your custodian, there will be a cost involved.
And with this custodial issue comes another distinction, which is whether your plan stipulates that it is individual directed or trustee directed. You might think that you want your account to be individually directed, but surprise! That’s not what gives you greatest flexibility. Instead, you want it to be trustee directed, and you want the trustee to be you.
Now all of these distinctions are generally a function of and decided by something called an “Adoption Agreement” which is a long document that has a whole lot of “check the box” types of options… and the vast majority of those boxes should be checked the same way by absolutely everybody. But it’s the few issues like we’ve discussed here that make the difference, and that’s why the last distinction is, I think, the most important.
The final distinction from one provider to the next is the expertise of the provider themselves, and their availability to assist and answer questions. Solo 401k’s are kind of a weird thing… I’ve seen many examples of people who sell these plans, but they aren’t an attorney or an accountant or anything else. Look, I’m not necessarily knocking that… I’m not an attorney or accountant either, and God knows my knowledge of these topics is vastly superior to most licensed professionals, even most who claim expertise in this area.
Having said that, be really careful about who you choose to set your self-directed 401k. I tend towards thinking that the best options are not the self-directed IRA companies who also happen to offer 401k’s, but the small handful of lawyers who actually know something about these plans. You’ll likely pay a little more to have them set up your self-directed 401k, but it will be done right, and will be exactly what YOU need.
And a quick warning about fees. Look… some Solo 401k providers charge a one-time fee and then never charge again. I really wonder how they can do that. Look, I don’t want to pay annual fees any more than the next guy, but here’s the thing: The regulations for those plans change frequently… nearly every year… and that frequently requires the plan trustee – that would be you – to update your documents. Failure to update your documents means you’ve invalidated your plan… and that’s a high price to pay. So if nothing else, confirm with your solo 401k provider how your plan documents will be updated when required, because it’s required frequently.
I, of course, continue to recommend THE GREAT ONE, attorney Tim Berry in Phoenix, as the right place to go for solo 401k’s. Tim isn’t paying for a commercial, and he’s not compensating me for this endorsement. I just happen to think he’s the best in the business. His contact info is right here.
So there you have it, my friends… some important distinctions to watch out for if you’re considering the use of a solo 401(k).
That’s all for now. But tomorrow’s show will be a GREAT ONE, my friends, as we delve into the ugly waters of politics again… and a HUGE opportunity that is developing before our very eyes with the potential PRIVATIZATION of Fannie Mae and Freddie Mac by the Trump Administration. This isn’t about liberals or conservatives or Republicans and Democrats… it’s about making you money, so be sure to tune in to the next episode right away, the link to which is on today’s show notes page at SDITalk.com/247.
My friends… invest wisely today, and live well forever!
Bryan Ellis is host of Self Directed Investor Talk, America's #1 radio show and podcast for affluent self-directed investors. He's also an expert in self-directed IRA's, solo 401k's and turnkey rental property investing... at least, that's what his wife tells him 🙂 He's a contributor to well-respected publications like TheStreet.com, Entrepreneur and ThinkRealty. Bryan lives in metro Atlanta, Georgia with Carole Ellis - his wife, business partner and best friend - and his 4 children ranging in age from 2 to 19.