A Self-Directed Case Study – An IRA or 401K for Jim and Susie?

Note from John:  This post will only identify certain benefits of a self-directed 401K vs. a self-directed IRA.  Another blog post will identify additional benefits of the 401K over the IRA.

In blog post titled:  “Can an IRA be Co-Jointly Owned (Remember the “I”)? (May 3, 2012), we spoke of Jim and Susie’s question about whether they could co-jointly own each other’s IRA accounts.  We spoke of both of their IRAs having values of $60,000 (Jim) and $40,000, respectively.  Jim and Susie inquired about establishing self-directed IRAs so they would have checkbook control of their retirement assets.  They learned about how both of their IRAs could fund (or purchase the assets of) one LLC that could hold their IRA assets.  Ownership of each IRA into the LLC would be directly proportional to the amount of funding into the LLC from each IRA.

Okay, that was THAT conversation….Jim and Susie were all set…or were they?! (the mystery deepens!!)

Jim mentioned in the conversation that he was self-employed while his wife was a W-2 employee.  With Jim’s  business, he had no employees other than himself.  And, to answer your next question…Susie was not employed by or with Jim’s business.

The debate

What occurred next was a spirited conversation on the merits of Jim establishing for his business a self-directed 401K plan.  It wasn’t a matter of qualifying for the plan….Jim did qualify.  But, why should he consider the 401K vs. the IRA?  Further, Jim’s primary interest was the ability to use both he and his wife’s funds from one IRA LLC account, where each IRA had proportional ownership interests.  Wasn’t talking about a 401K messing this whole thing up?  Needless to say, he was perplexed.

Jim’s eyes grew large (metaphorically speaking…I couldn’t tell as I was on a call with him), when he was informed that by having a 401K, he could see the following benefits:

1)  Both Jim and Susie being able to “rollover” their Traditional IRAs into one 401K plan of which they would both serve as co-trustees.

2)  To further benefit Jim and Susie, while they would have all $100,000 ($60,000 for Jim/$40,000 for Susie) in the 401K plan and available for investing purposes, both Jim and Susie’s respective funds would be segregated into 401K sub-accounts in each of their respective names.

3)  While they could also have an LLC established for their 401K, they had “checkbook control” of their 401K plan without the LLC….and, immediate access to their funds for investment purposes.  Also, since they ended up electing NOT to have an LLC, they would save the LLC set-up expense (where they would need the LLC for the IRA, in comparison), which in their case totaled $750.00.

4)  Finally, since they were not establishing IRAs (two total; one IRA for Jim and one IRA for Susie), they would save almost $250.00 per year in IRA custodian fees.  Jim was even amazed how PGI could possibly establish the 401K with no annual fees. Remember, the 401K does not require a custodian when there are appointed Trustees that the plan documents permit.

5)  As both Jim and Susie were co-trustees of the plan (by virtue of being married), Susie was permitted to rollover her funds into the 401K plan even though Susie was not an employee of Jim’s.

6)  Finally, in the case of death of either Trustee, the other Trustee can carry on the plan even after death.

Guess what?………Jim and Susie established the 401K!

This entry was posted in 401(k)'s & IRA's on by .

About John Park

John Park is a facilitator for self-directed IRAs and 401Ks and founder of PGI Agency, Inc. which is host to PGI SelfDirected. Prior to that, John maintained his own insurance agency and also worked in intercollegiate athletics (Arizona State University, Big Ten Conference Office). For over 6 years, PGI has established both self-directed IRA and 401K accounts so that individuals can take control of their retirement assets and invest in both Traditional and Non-Traditional (e.g., real estate) assets. John believes that most people should fully explore having FULL control of their retirement funds and be the steward of their own money.

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