IRA vs. 401(k)

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As the marketplace for investment opportunities has evolved, available options for retirement strategies have followed suit. Different combinations of retirement plans, publicly traded securities, and alternative investment options allow investors to adopt a strategy that satisfies their financial goals. However, some may speak of IRAs and 401(k)s interchangeably, while others may not be overly familiar with either account type. In determining the most advantageous course of action for retirement, it’s important to understand the differences between a self-directed IRA and a self-directed Solo 401(k).

Your Role

As a self-directed IRA holder, you direct investment activities but your IRA provider maintains custodial control. SEP or SIMPLE IRAs involve employer contributions, but even they must remain under the umbrella of a custodian. The custodial relationship dictates that an authorized signer must sign any investment documents on behalf of the plan.

If you have a Solo 401(k), you may occupy some or all possible roles when managing the account: employee, employer, trustee, administrator, etc. If you name yourself as trustee of your 401(k), you would be the authorized signer when initiating transactions. In this regard, 401(k)s can provide a higher degree of flexibility.

Choosing Alternative Assets

With self-directed IRAs, you can invest in anything permitted by the IRS. Collectibles, insurance, and s-corporations are prohibited, but everything else is fair game. The only other potentially inhibitive parameters would lie in the specific policies of certain IRA providers. New Direction Trust Company empowers investors by mirroring the IRS guidelines – if it’s legal, your IRA can hold it!

Although an administrator may also oversee a 401(k), the plan document will be the true barometer that specifies your investment options. Certain documents may restrict participants to a finite list of products or disallow alternative assets altogether. These policies sometimes derive from the costs associated with administering certain assets. If you lease a plan document from New Direction Trust Company, you’ll have the same spectrum of investment possibilities as our IRA holders.

Borrowing Against your Plan

If the plan document allows it, holders may borrow against their 401(k)s and make payments down the road. IRA holders are unable to do so. Don't confuse this with your IRA borrowing money to purchase an asset or issuing a private loan, both of which are perfectly allowed. IRAs and 401(k)s can both acquire financing to pursue an investment opportunity, or issue loans to non-disqualified persons and collect interest. Only Solo 401(k) participants can draw a temporary loan for themselves because, even though they’re the same person, the trustee (who issues the loan) remains distinguished from the participant (who receives the loan).

Roth Contributions

401(k) holders may contribute pre-tax and post-tax funds to the same plan if permitted by the plan document. For IRA holders to garner these same benefits, they would need to open both a Traditional IRA (pre-tax) and a Roth IRA (post-tax).

For all investors in their various walks of life, many factors can contribute to long-term financial success and should be considered accordingly. All self-directed retirement vehicles provide substantial tax advantages, so you can find the one that's most conducive to your unique situation. For more information about self-directed retirement accounts, please contact New Direction Trust Company at or 877-742-1270.