Remember, to have a ROTH 401K, or any other 401K for that matter, an individual must qualify as a self-employed individual. But, if you are one of the fortunate people who qualify for the 401K, you may wonder why you would ever consider an IRA as your sole retirement option, when compared to the extensive benefits of the 401K.
So, what are these extensive benefits and why should one consider a self-directed ROTH 401K?
1) The obvious is that by having a checkbook-controlled ROTH 401K, you will have the freedom and flexibility to invest in any asset class permitted under IRS regulations. As long as you do not invest into a Disqualified Asset (Item #1), the IRS does not preclude you from investing in assets other than stocks, bonds and mutual funds.
2) In your newly-established, self-directed ROTH 401K, you can make much larger contributions to the 401K that you can with any IRA. Compared to your standard IRA plans (Traditional or ROTH IRAs), you can make elective employee deferral contributions of up to $17,000 (under the age of 50) or $22,500 (over the age of 50) on your first 100% of self-employment income. Yes, in general terms, if you were under the age of 50 and wanted to contribute all $17,000 of your self-employment earnings into your 401K, you could do this.
Further, through profit-share arrangements, profit-share contributions (based on your percentage of profit/income) can take the total amount contributed to the self-directed ROTH 401K up to $50,000 (under the age of 50) or $55,500 (over the age of 50). Oh, did we forget to say that your standard IRAs will allow you to contribute up to $5,000 (under the age of 50) or $6,000 (over the age of 50)!
3) ROTH 401K contributions are NOT subject to the Modified Gross Income limitations imposed by the IRS. Where you may not be able to fully contribute to an IRA based upon the MGI limitations, a 401K has no such limitations. The contribution limits are placed based on earned income….so, where the MGI prohibits some from making full IRA contributions, that is not the case with a self-directed ROTH 401K.
4) The ability to make BOTH Traditional (pre-tax) and ROTH contributions into one plan. Now, the contributions have to be segregated into separate accounts (ROTH and Traditional) within the 401K, but his is a relatively easy process. Plus, you would always want the funds segregated….even if not required…to protect the value and account of your ROTH funds. The point, however, is that you can have both Traditional and ROTH funds in the 401K and use both funds for investment purposes. You cannot do this with your father’s IRA.
Are there additional benefits associated with the ROTH 401K vs. an IRA….absolutely. However, these four benefits sufficiently define why one might want to consider establishing a self-directed ROTH 401K account. Remember, it’s not IF it is better, but rather do you qualify.