The most-asked question we had during our tax strategy webinar was about the difference between UBIT, UDFI, Self Directed IRAs and Solo 401Ks.

The acronyms can be confusing…so let’s make it simple:

I hope this helps.

Here’s a little cheat sheet for you as well:

Traditional 401Ks:
These are offered usually through an employer. There are two limitations of a traditional 401K:
Potential for High Fees: Some 401(k) plans have high administrative and management fees, which can eat into your investment returns over time. It’s important to understand the fee structure of your plan.
Limited Investment Options: Unlike IRAs, particularly Self-Directed IRAs, the investment choices in a 401(k) are limited to the options selected by the employer. This can restrict your ability to diversify your portfolio or invest in specific assets you might prefer.

Self Directed IRAs:
Who can open a self-directed IRA?
Self-Directed Individual retirement account (IRA) is a type of IRA where the investor has more control and flexibility in choosing the investments. Unlike traditional or Roth IRAs, where investment options might be limited to stocks, bonds, and mutual funds, a self-directed IRA allows for a wider range of investment choices
These are subject to 2 forms of tax: UDFI and UBIT tax.

Solo 401K
Who can open a Solo 401K?
If you’re self-employed and work alone without any employees, you have the option to open a solo 401(k), which is a retirement savings plan.
This also applies if you are running a business with your spouse.
With a solo 401(k), you have the unique advantage of contributing as both the employer and the employee, which allows you to save more for your retirement…as always, I suggest talking to your CPA if you have further questions.
A Solo 401K, or “SoloK”, is subject only to UBIT tax.

It’s my goal to demystify this for you. Why? Because investing can be for everyone, and it can greatly benefit you if you arm yourself with knowledge. There are no silly questions, and these videos came directly from feedback I received from all of you.

Join the Confident Investor community for more videos and interviews to help increase your financial knowledge: …(read more)

LEARN MORE ABOUT: IRA Accounts

INVESTING IN A GOLD IRA: Gold IRA Account

INVESTING IN A SILVER IRA: Silver IRA Account

REVEALED: Best Gold Backed IRA

When it comes to saving for retirement, there are a variety of options to choose from. Two popular choices for self-employed individuals are a self-directed individual retirement account (SDIRA) and a solo 401(k). While both accounts offer tax-advantaged ways to save for retirement, there are key differences between the two that individuals should consider when deciding which option is best for them.

One major difference between an SDIRA and a solo 401(k) is who is eligible to open each type of account. As the name suggests, a solo 401(k) is intended for self-employed individuals with no employees, other than a spouse. On the other hand, an SDIRA is available to anyone who meets the income requirements for contributing to a traditional or Roth IRA, regardless of their employment status. This means that individuals with full-time jobs can also open an SDIRA, while a solo 401(k) is specifically designed for self-employed individuals without employees.

Another key difference between the two accounts is the contribution limits. For the 2021 tax year, the contribution limits for a solo 401(k) are higher than those for an SDIRA. Individuals can contribute up to $19,500 to a solo 401(k) as an employee and up to 25% of their net self-employment income as an employer, for a total contribution limit of $58,000. On the other hand, the contribution limit for an SDIRA is $6,000, or $7,000 for individuals age 50 and older.

In addition to higher contribution limits, a solo 401(k) also allows for a catch-up contribution for individuals age 50 and older, while an SDIRA does not offer this option. This can be a significant advantage for older individuals who are looking to boost their retirement savings in the years leading up to their retirement.

Another important distinction between the two accounts is the investment options available. While both accounts offer a wide range of investment options, an SDIRA typically provides more flexibility when it comes to choosing investments. With an SDIRA, individuals have the ability to invest in a variety of assets, including real estate, private equity, precious metals, and more. On the other hand, a solo 401(k) usually has more limited investment options, often restricting investments to stocks, bonds, and mutual funds.

Lastly, there are different administrative and reporting requirements for each type of account. A solo 401(k) typically involves more paperwork and administrative responsibilities, as it is subject to stricter reporting and compliance requirements. On the other hand, an SDIRA may offer more flexibility and autonomy when it comes to managing the account, as it is often administered by a custodian or trustee.

In conclusion, both SDIRAs and solo 401(k)s offer self-employed individuals tax-advantaged ways to save for retirement. However, there are important differences between the two accounts that individuals should consider when choosing the best option for their specific financial situation and retirement goals. It is important to carefully evaluate the eligibility requirements, contribution limits, investment options, and administrative responsibilities associated with each type of account before making a decision. Consulting with a financial advisor or tax professional can also be beneficial in determining the best retirement savings strategy.