Armed with correct information and support team, setting up a Self-Directed 401(k) or IRA is quick and easy.
Yes, the Self-Directed retirement plan is a bit more involved, but it could prove to be one of the best decision you ever made towards securing your financial freedom.
We have pulled from our experiences with opening our own plans and from a couple of the market experts to provide guidance to help make this process simple to open and manage.
Prerequisites: What You Need to Do First
Prior to opening your Self-Directed 401(k) or IRA, you first need to answer the following questions. Don’t worry if you don’t have all the answers. We have industry experts that can guide you through the process.
What TYPE of retirement plan do you want?
There’s a bunch of options out there. We covered the 2 best options for entrepreneurs in our previous article: the Solo 401(k) and SEP IRA. There are others, you just need to have an idea which one is best for your situation.
Do you want a Traditional or Roth Plan?
While I personally love Roths, you need to determine what’s best for you. It might even be a combination of different plans that fit best. Check out our article covering Roths to get more information on the difference between Roth and Traditional plans.
Do you want a Custodian-managed or Checkbook Control Plan?
Custodian-managed plans require you to complete additional paperwork and pay fees each time you buy or sell an investment.
Checkbook Control plans allow you to make the investments directly through an LLC that you own. You will have to ensure each investment is done in compliance with the IRS laws, but you will not have to complete additional paperwork and incur fees with each transaction.
We covered this in detail in our previous article and provided links to acceptable and prohibited investments.
Again, you may not have answers to all of these questions, but understanding the options will go a long way to streamline the setup process.
Let’s Get Started!
Depending on the type retirement plan and responsiveness of your current Custodian, setting up your Self-Directed 401(k) or IRA can take 1-4 weeks to complete. We have summarized the processes below.
You must use an Administrator or Custodian to set up and manage the IRA. Custodians must be a bank or trust company, are approved by the IRS and have a lot of regulations around how they operate.
Administrators act more of an educator and consultant to guide you through the process. They must work with an approved Custodian to hold the actual IRA. Sean and I like the extra hand-holding provided by Administrators.
Once you define the type of IRA, you simply complete their online forms to open the account and complete any contribution, transfers or rollovers. The funds are now in your IRA.
While working through this paperwork exercise, it’s smart to setup your LLC and open a business checking account. Nerdwallett.com has a nice listing of free Business Checking banks organized by State.
To make the IRA self-directed, you complete the Administrator’s Buy Direction form and instruct them to invest in your LLC.
Once the funds are in the LLC’s bank account, you can write checks to the investments directly. Again, be careful with each investment and ensure there are no prohibited transactions.
Although a Custodian is not required for a 401(k), we advise you work with an Administrator or a professional such as an Attorney to write and manage your 401(k) plan. This is a legal document that must meet the IRS rules and be adjusted as the rules change.
Unlike an IRA, there is no need to set up an LLC. Simply name yourself as the Plan Administrator and Trustee and you can initiate contributions, rollovers and control the investments directly.
Once the 401(k) plan is funded, you can write checks to the investments directly. Again, be careful with each investment and ensure you there are no prohibited transactions.
You will need to complete IRS Form 5500 annually for accounts exceeding $250,000. This is a simple process if you use an Administrator and their online forms.
Who Can You Use To Help Setup Your Plan?
It is ultimately up to you to make the decision. We have worked with some great Administrators and Custodians – and well, some not-so-great ones.
You can work with a Custodian directly, but we like using Administrators because they are there to hold your hand through the process, answer questions and simplify compliance.
To help you with this decision, we have built business relationships with 2 of the best Administrators in the market today.
New Direction IRA has a custom application form specifically built for friends of IAN .
American IRA has special discounts for friends of IAN. Simply check the “Referred By” check box on the application and write “IAN” on the space provided.
The thought of taking on and setting up your Self-Directed 401(k)/IRA may seem scary. However, with the information we have provided in our past 3 articles, you are more educated than most people that have plans.
Armed with this knowledge and great support from Administrators shown above, the process can quick and easy.
If you found any value in this article, please leave a comment below like our Facebook page and forward it on to someone you care about. If you are interested in talking to an expert, we have provided you with two great options.
You don’t have to use these specific Administrators, but if you do, you will get a discount off of their normal pricing and it’s a great way to support us as these great companies give us a finder’s fee. At no cost to you.
Exciting, New Strategy Revealed Next Week!
I am soooooo excited to share a new strategy with you next week. It uses the concept as a Self-Directed IRA, but takes it to the next level: a triple tax-free account!
- Fund it with pre-tax money
- It grows tax-free and
- You use it tax-free
Any guesses on what this new triple tax-free strategy is?