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How to make your self-directed retirement plan work

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Sarah A. Miller/The Tyler Morning Telegraph/AP/File

(Read caption) Jackson Ashby, 2, of Flint, fishes with his grandmother Lolli Ashby and grandfather Rick Ashby in Tyler, Texas. Setting up a retirement plan is a good action toward financial wellness, but there are more steps to take to make your self-directed plan work for you.

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Business owners: Do you have a self-directed retirement plan, such as a Solo 401(k) or self-directed IRA? Congratulations! You’ve taken a big step toward taking control of your financial future.

But having the plan is just the beginning. A retirement plan is not just a savings account to stash your hard-earned money in. It’s where your money can grow and provide perpetual income. In other words, your retirement plan needs to go to work and be earning income when you no longer do.

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Here are four steps to make sure your self-directed retirement plan is working hard for you:

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1. Contribute more

Before your plan can go to work, you need to provide contributions for it to work with. With the compounding effect, a small increase in contributions now can add up to a big difference in the future. Therefore, it’s important that you know your contribution limit, maximize your contributions — and start doing it as early as possible.

For IRA accounts, your yearly contribution is limited to $5,500, plus a catch-up allowance of $1,000 for those 50 and older. The Solo 401(k) plan has a much higher limit: $59,000 per year as of 2015.

2. Focus on long-term investments

Rather than chase the ups and downs of the market, focus on long-term passive investments. Doing so will free you to focus on running your business, while letting the plan grow. It will also help you avoid the Unrelated Business Income Tax, which may apply if the IRS sees your investments as an active business.

For example, if you decide to invest in real estate with a self directed Solo 401(k) or IRA, rental properties are great passive investments. Once the lease is set up, the rent can go directly to your account. On the other hand, house flipping and wholesaling are examples of active businesses that may incur additional tax charges.

3. Diversify your saving nest

As the owner of a self-directed retirement plan, you have significant leeway to choose investments to fit your financial goals. A diversified portfolio is a great way to lower your risk. With a self-directed retirement account, your options are no longer limited to securities like stocks and bonds. You can add alternative assets to the mix, including real estate, private lending, precious metals and more.

Keep in mind that while you can save on custodial fees with the self-directed retirement plan, you will be the sole decision maker. To successfully grow your retirement account, you need to do your due diligence and invest in what you understand best.

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4. Become an educated plan owner

Although the self-directed option gives you a lot of control, it also gives you certain responsibilities.

With a Solo 401(k), aside from being in charge of investment decisions, you’re also the plan trustee and administrator. That means you’re in charge of the record-keeping and tax filing, if necessary. While the task of managing a Solo 401(k) plan is quite simple compared with a traditional 401(k), plan owners still need to understand and fulfill their responsibilities.

Owners of both self-directed IRAs and Solo 401(k) plans must also avoid engaging in prohibited transactions. In most cases, that means keeping the plan investments separate from your personal funds. A good Solo 401(k) plan facilitator will help you understand your responsibilities and provide guidance.


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