FAQs: Investing Your Pension Fund Locally
1) How can I invest my tax deferred pension funds locally?
If you’re like most Americans, any pension savings you have are locked away in your workplace 401k or an Investment Retirement Account (IRA) you set up years ago. The companies running these funds will give you no local investment options. The solution is to create a Self-Directed IRA or a Solo 401k. With these do-it-yourself accounts, you can take charge of how to invest your money.
2) How does a Self-Directed IRA work?
Mostly, it’s like a regular IRA. You can open it any time you like, and tuck away, tax free, up to $6,000 per year ($7,000 if you are over 50). You are allowed to start withdrawing funds from it as early as age 59 ½, and at age 70 ½ you must start withdrawing funds. When you withdraw funds, you pay taxes (presumably at a time when your income and tax rate are lower). Self-direction means you must find a special firm that allows you to hire a custodian. As long as your local investment request is legal, your custodian usually will make the transaction on your behalf.
3) How does a Solo 401k work?
The Solo 401k gives self-employed workers the same opportunities to save for retirement as other workers. You can create an account with your favorite bank, duly register it in the name of your trust (not you), and then you are in the driver’s seat to invest locally.
4) Which is better, a Self-Directed IRA or a Solo 401k?
Compared to a Self-Directed IRA, a Solo 401k offers three advantages: First, the Solo 401k allows you to contribute significantly more money—up to $56,000 per year ($62,000 if you 50 or older). That’s almost ten times greater than the annual limit for your Self-Directed IRA! Second, since you are running the show, you don’t need to pay a Self-Directed IRA custodian any annual expenses. There are small expenses you may need to pay each year to purchase an IRS-approved plan, but these are typically just a few hundred dollars. Third, you can make a low-interest loan to yourself of up to $50,000 or 50% of your account, whichever is less. And there are no limits on how you can use the loan! Giving yourself a loan like this is illegal under a Self-Directed IRA.
5) If I have a day job and a side hustle, can I still open a Solo 401k?
Yes. But you can only put money into the Solo 401k that you earned from your side hustle. The main requirements to open a Solo-401k are that you have income on your Schedule C and no full-time employees (defined as working more than 20 hours per week).
6) Can I have both a Self-Directed IRA and a Solo 401k?
Sure, but why have the hassle and expense of two accounts? Again, the Solo 401k will probably allow you to tuck away as much income as you can afford to save.
7) Is it possible to create a “Roth” Self-Directed IRA or “Roth” Solo 401k?
Yes. “Roth” retirement accounts were named for the sponsor of the 1997 legislation creating them, Senator William Roth of Delaware. With the Roth IRA, you pay taxes on the full amount when the funds are put into your account, and then all the subsequent gains you access upon retirement are tax free.
8) Most of my savings are locked in a 401k right now, and I don’t see myself creating a new job for myself. What can I do to become a local investor?
Sell a few things on E-Bay and report the income on Schedule C of your federal 1040 tax form, and then create a Solo 401k. When you leave your current job—by retirement or resignation—you can then roll over that 401k into your Solo 401k, and you’re off to the races!
9) Can I create an LLC owned by my Self-Directed IRA or Solo 401k?
Yes. And the beauty is that because the income flows directly into your tax-deferred account, you typically don’t need to pay taxes on it. But you need to be careful here and pay attention to some of the rules mentioned below. If you create a business that’s owned by your account from day one, you’re safe. Moving an existing business into your account can present problems.
10) What are the rules governing what I can and cannot invest in with my Self-Directed IRA and Solo 401k?
There are a lot of them. And to get fully informed, you may want to read the Exchange co-founder's book, Put Your Money Where Your Life Is (which is available at most local libraries and book stores). Broadly speaking, you should not invest in any property, project, or business owned by yourself or your immediate family. You also should avoid even the appearance of benefiting these “disqualified” people. For example, if your account owns an apartment, your staying in the apartment one night—even if you pay rent—is regarded as an illegal act of self-dealing! But it’s also worth noting that if you make yourself a loan from a Solo 401k, you can use those funds for anything you want.
11) Where can I find help with these complicated rules?
You might join The Next Egg, where several hundred members puzzle through their questions together in discussion groups and webinars.
12) How can I find providers for a Self-Directed IRA or a Solo 401k?
The Next Egg (above) maintains good lists for Self-Directed IRA providers and Solo 401k providers who support local investors.
1) How can I invest my tax deferred pension funds locally?
If you’re like most Americans, any pension savings you have are locked away in your workplace 401k or an Investment Retirement Account (IRA) you set up years ago. The companies running these funds will give you no local investment options. The solution is to create a Self-Directed IRA or a Solo 401k. With these do-it-yourself accounts, you can take charge of how to invest your money.
2) How does a Self-Directed IRA work?
Mostly, it’s like a regular IRA. You can open it any time you like, and tuck away, tax free, up to $6,000 per year ($7,000 if you are over 50). You are allowed to start withdrawing funds from it as early as age 59 ½, and at age 70 ½ you must start withdrawing funds. When you withdraw funds, you pay taxes (presumably at a time when your income and tax rate are lower). Self-direction means you must find a special firm that allows you to hire a custodian. As long as your local investment request is legal, your custodian usually will make the transaction on your behalf.
3) How does a Solo 401k work?
The Solo 401k gives self-employed workers the same opportunities to save for retirement as other workers. You can create an account with your favorite bank, duly register it in the name of your trust (not you), and then you are in the driver’s seat to invest locally.
4) Which is better, a Self-Directed IRA or a Solo 401k?
Compared to a Self-Directed IRA, a Solo 401k offers three advantages: First, the Solo 401k allows you to contribute significantly more money—up to $56,000 per year ($62,000 if you 50 or older). That’s almost ten times greater than the annual limit for your Self-Directed IRA! Second, since you are running the show, you don’t need to pay a Self-Directed IRA custodian any annual expenses. There are small expenses you may need to pay each year to purchase an IRS-approved plan, but these are typically just a few hundred dollars. Third, you can make a low-interest loan to yourself of up to $50,000 or 50% of your account, whichever is less. And there are no limits on how you can use the loan! Giving yourself a loan like this is illegal under a Self-Directed IRA.
5) If I have a day job and a side hustle, can I still open a Solo 401k?
Yes. But you can only put money into the Solo 401k that you earned from your side hustle. The main requirements to open a Solo-401k are that you have income on your Schedule C and no full-time employees (defined as working more than 20 hours per week).
6) Can I have both a Self-Directed IRA and a Solo 401k?
Sure, but why have the hassle and expense of two accounts? Again, the Solo 401k will probably allow you to tuck away as much income as you can afford to save.
7) Is it possible to create a “Roth” Self-Directed IRA or “Roth” Solo 401k?
Yes. “Roth” retirement accounts were named for the sponsor of the 1997 legislation creating them, Senator William Roth of Delaware. With the Roth IRA, you pay taxes on the full amount when the funds are put into your account, and then all the subsequent gains you access upon retirement are tax free.
8) Most of my savings are locked in a 401k right now, and I don’t see myself creating a new job for myself. What can I do to become a local investor?
Sell a few things on E-Bay and report the income on Schedule C of your federal 1040 tax form, and then create a Solo 401k. When you leave your current job—by retirement or resignation—you can then roll over that 401k into your Solo 401k, and you’re off to the races!
9) Can I create an LLC owned by my Self-Directed IRA or Solo 401k?
Yes. And the beauty is that because the income flows directly into your tax-deferred account, you typically don’t need to pay taxes on it. But you need to be careful here and pay attention to some of the rules mentioned below. If you create a business that’s owned by your account from day one, you’re safe. Moving an existing business into your account can present problems.
10) What are the rules governing what I can and cannot invest in with my Self-Directed IRA and Solo 401k?
There are a lot of them. And to get fully informed, you may want to read the Exchange co-founder's book, Put Your Money Where Your Life Is (which is available at most local libraries and book stores). Broadly speaking, you should not invest in any property, project, or business owned by yourself or your immediate family. You also should avoid even the appearance of benefiting these “disqualified” people. For example, if your account owns an apartment, your staying in the apartment one night—even if you pay rent—is regarded as an illegal act of self-dealing! But it’s also worth noting that if you make yourself a loan from a Solo 401k, you can use those funds for anything you want.
11) Where can I find help with these complicated rules?
You might join The Next Egg, where several hundred members puzzle through their questions together in discussion groups and webinars.
12) How can I find providers for a Self-Directed IRA or a Solo 401k?
The Next Egg (above) maintains good lists for Self-Directed IRA providers and Solo 401k providers who support local investors.