Advantages Self Directed 401(k) plans for Sole Proprietors can have over Self Directed IRA LLC’s*

Please note that 401(k) plans designed for Sole Proprietors or Self Employed Couples are called by various names like Individual (k) or Solo (k).  Different plan sponsors may have different names for similar 401(k) plans designed for the same market. Please note that these plans are designed for Sole Proprietors that have no employees working more than 500 hours per year. Employers with employees working at least 1000 hours per year (or 500 hours if they leave service and are subsequently rehired) must include all eligible employees in any qualified plan, including those that offer self direction by plan participants.

1. Tax Deferred or Tax Free Growth based on your allocation of contributions into the Tax Deferred or Tax Free components in a 401(k) (An Individual (k) includes a Roth tax free component).  An IRA LLC Does not have a Roth (after tax contributions, tax free distributions) component (although you can set up a Checkbook Control, Self Directed Roth IRA).

2. Asset protection in a Single Member LLC is more marketing myth than legal fact. Consult your legal professional for information on your state laws.

3. Asset protection in an IRA is governed by State Statutes and varies from state to state with some states mirroring federal statutes and others allowing attachment of assets in an IRA under various circumstances. Asset protection in a Solo (K) may not be the same as the protection afforded 401 (k) plans that fully comply with ERISA provisions.  Check with your legal professional before assuming that assets in your Individual (k) are fully protected from creditors. There is a good CPA article on this at http://www.petershannonco.com/timely_tax_topics2.htm 
 
4. In a 401(k),  an LLC is not required for Checkbook Control or Asset Protection- therefore there are no annual Franchise Tax Fees to maintain the LLC ($800 annually in CA)

5. In a 401(k) you can have Check Writing privileges acting as Trustee for the 401 k plan
6. Ability to purchase Life Insurance with pre-tax dollars in a 401(k).

7. No total distribution of all plan assets for Prohibited Transactions in a 401(k) (this reason alone is enough to justify the k plan).  If you accidentally make a prohibited transaction in an IRA all of the assets in the IRA will be considered distributed and the IRS will tax you on all of the assets in the IRA and will penalize you if you are under age 59 1/2.

8. Ability to borrow from a properly designed 401 k plan up to the lesser of $50,000 or 50% of assets (you cannot borrow from your IRA).

9. Legal Distributions which begin at age 55, not age 59 ½, can save you paying the 10% IRS penalty associated with Distributions before 59 ½ and/or allow you to retire earlier.

10. A 401(k) plan has much higher annual contribution limits than any IRA (deductible contribution limits for an incorporated couple under 50 are over $45,000 in 2009 including profit sharing, with no income restrictions (IRA and Roth IRA’s have income limits for deductibility of contributions).

11. Ability to purchase leveraged real estate in a 401(k) without generating the same income taxes created by profits on leveraged Real Estate in an IRA because of Unrelated Debt Financed Income (UDFI). This applies to purchase money only.

12. In a 401(k) you have the ability to purchase shares in S-Corp stocks that is specifically excluded in an IRA (along with the purchase of Life Insurance and “Collectibles”).

*Not all Self Directed 401(k) plans or IRA’s offer Debit Cards/Checkbook Control. Availability of all legally available features in a 401(k) plan or IRA is dependent on the design and construction of the plan documents by the plan sponsor. Some plan sponsors elect to draft a plan that does not include all legally available features in order to control plan holder options for the benefit of the sponsor. Before you select a plan sponsor, create a check list of the features you want to have included in your plan design and compare the list to the options offered by a prospective plan sponsor. Checkbook control may not be suitable for individuals who are not familiar with regular book keeping and tax forms and who do not balance their check book. Third Party administration and book keeping may better serve you if you are not good at keeping your own records.