Author Topic: Self Directed Solo 401k?  (Read 1170 times)

JenniferW

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Self Directed Solo 401k?
« on: September 16, 2018, 05:58:27 PM »
Has anyone setup one of these? I'm interested in the Roth variant of this.

I like the idea of this because I'd hold my own trust and be allowed to invest how I see fit.  E.g. say use Robinhood for stock acquisitions commission free.  And perhaps cherry pick benefits from other brokerages like Vanguard for their low cost Admiral Shares & ETF index funds (e.g. VTSAX, VTI, VOO, etc.).

I would go with Vanguard Solo 401k -- i.e. not self directed -- but they don't allow you to trade stocks or ETF within it and their expense ratios are three times higher than admiral share / ETF funds in a Roth IRA account.  (Also they charge $20 per fund annual fee if your combined Vanguard investments total less than $50k -- which would probably be $40 per year for me since I'd want both total index and bond funds.)

What firm did you use and how much did it cost you? (Or what firms seem interesting to you?)  Do you have an ongoing relationship?  Will they offer ongoing support / training / answering questions, at a reasonable rate? Will they update/amend the plan documentation as needed to keep up with IRS code?  (I read there are severe penalties if your plan documentation doesn't stay updated.)

I want to do this if it would not be too much work to administer. I realize I'd need to file a 5500 EZ once per year once the balance becomes larger than 250k, and that doesn't seem too hard.. the form isnt that long.

I am already familiar with some of the rules like prohibited investments .. e.g. like not doing investment business with family, etc.  So I realize one has to be careful.  Hopefully the lawyer(s) one hires would make all this clear and offer telephone support if any questions arise.

I also do like the option later on to invest in other things within this Roth account (e.g. real estate), but right now just focusing on low expense ratio funds and commission free stock trades.  Also, the 50% / 50k loan feature seems appealing (at prime + 2%).
« Last Edit: September 16, 2018, 06:09:32 PM by JenniferW »

JenniferW

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Re: Self Directed Solo 401k?
« Reply #1 on: September 18, 2018, 10:12:45 PM »
Has anyone here had any experience with the following 401k plan documentation service?

https://www.solo401k.com

jacoavluha

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Re: Self Directed Solo 401k?
« Reply #2 on: September 18, 2018, 10:19:06 PM »
You should just use a free brokerage solo 401k plan. Vanguards offering is not as good as others. Consider E*TRADE and Schwab.

JenniferW

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Re: Self Directed Solo 401k?
« Reply #3 on: September 18, 2018, 11:35:27 PM »
I like the idea of being to take a 50k loan, where I get to draw up the Promisary Note and set the interest rate.   Then I get to pay back the loan in 5 years with all the interest going back into the retirement plan.  So it would be like it never left, because it still gains interest.   Seems like this would be an awesome emergency fund and wouldn't need a cash one then.  I could go to my own bank which holds the trust and withdraw the 50k after I sign the promisary note.

HAPPYINAZ

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Re: Self Directed Solo 401k?
« Reply #4 on: September 19, 2018, 07:34:04 AM »
I like the idea of being to take a 50k loan, where I get to draw up the Promisary Note and set the interest rate.   Then I get to pay back the loan in 5 years with all the interest going back into the retirement plan.  So it would be like it never left, because it still gains interest.   Seems like this would be an awesome emergency fund and wouldn't need a cash one then.  I could go to my own bank which holds the trust and withdraw the 50k after I sign the promisary note.


I looked into doing a self directed 401K like you are talking about and the only advantage is if you want to have other investment types in your solo401K, like real estate.  But if you plan to primarily invest in the stock market, the free plans from Etrade are your best option.  Borrowing from your retirement plans is a bad idea.  You are paying the interest to loan yourself your own money. 
 Better off to build an emergency fund and then start investing.  The money you save on fees to open and maintain a self directed 401K would help you build an emergency fund.  Or depending on where you are on your financial journey, you might be able to skip having a dedicated emergency fund and rely on a credit card to pay for unexpected expenses.  Then sell some stocks in a taxable investment account to pay off the credit card in the event of some major emergency.  There is a ChooseFI podcast about this idea.  Obviously that is only good if you are not living paycheck to paycheck and have money invested in taxable acct. 

jacoavluha

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Re: Self Directed Solo 401k?
« Reply #5 on: September 19, 2018, 08:22:56 AM »
I like the idea of being to take a 50k loan, where I get to draw up the Promisary Note and set the interest rate.   Then I get to pay back the loan in 5 years with all the interest going back into the retirement plan.  So it would be like it never left, because it still gains interest.   Seems like this would be an awesome emergency fund and wouldn't need a cash one then.  I could go to my own bank which holds the trust and withdraw the 50k after I sign the promisary note.

This is not really true. It's not like the money "never left". You are converting the money from an investment in "A" to an investment in "B". Typically, "A" would be some long term investment, such as a low cost, broad equity index fund. "B" in your case would be a fixed income loan, which so happens to be a loan to yourself. As a young person, it is wiser to invest in "A" than "B".

Also, you may not be able to "set the interest rate." I could be wrong but I believe there are restrictions on this, something like prime rate plus 2%.

There are far better options for an emergency fund, than relying on a 401k loan.