IRA vs 401(k) ? eligibility | Self Directed 401k & IRA Solutions by ...

Self directed 401(k)s are being heavily marketed as a preferred alternative to self directed IRAs. ?They generally cost more to set up (although there can be significant downstream savings for some investors), which provides much of the marketing incentive for the businesses marketing them. ?Typically, these self directed 401(k)s involve a ?Solo-K? or Small Business 401(k), which limit employment to no more than a few immediate family members. ?This is done primarily to avoid the regulations regarding ?highly compensated employees,? which by definition includes ownership regardless of income.

As a result, self directed 401(k)s, which for some people but not all, have advantages over self directed IRAs, is only available to people who own bona fide active businesses. ?However, if the business is large enough to have more than a few employees who are not close family, it is typically impractical or disadvantageous to have a self directed 401(k) plan for the business which allows investment in non-traditional assets.

Caveat: the temptation to use independent contractors in place of employees should be avoided, or at least done only after legal consultation, as that can lead to substantial liability and penalties.

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