Self-Employed? SEP vs. Solo 401(k) (Part 4)

In today’s post, we are going to try to save you some money…..yay!!  Here are two additional reasons why a qualifying candidate should seriously consider the Solo 401(k) over the SEP-IRA….and, it may just save you some money as well.

No IRA Custodian Fees

Yes, a great benefit of the Solo 401(k) is that is not required to be held through a custodian. Sure, your account will be housed at a financial services institution but, as Trustee of the plan, you have full control of the plan and its assets.  Whereas, an IRA (self-directed or not) is required by law to be held through a custodian “holding” the IRA assets.  Obviously, any time a custodian is involved, there will be additional fees (I always say to clients, “a custodian requirement for an IRA is required…and, the custodian is not a charitable organization”).  Specifically, in the case of a self-directed IRA, you will have the option to self-direct through an IRA LLC chassis, or have the IRA custodian invest funds on the behalf and at the request of the IRA account owner…but you will still have a custodian fee.

But, did I prematurely get you too excited about cost savings?  Maybe, and here is why:

It is true that the Solo 401(k) will not incur the annual custodian fee.  But, depending on what company you utilize for being your 401(k) plan document sponsor, you most likely will incur an annual maintenance fee for the 401(k) plan documents.  These maintenance fees will typically range between $50 – $300 annually, depending on which company you work with for your 401(k) documents.  As an example, you may have an IRA custodian who has fees of $200 per year for the IRA or IRA LLC.  In contrast you may have an maintenance fee for a Solo 401(k) plan of $150.  Obviously, in this hypothetical example, you would have savings of $50 per year by electing the 401(k).  Of course, the opposite could be true….you could have a $150 annual fee with the IRA custodian and a $200 annual maintenance fee with the Solo 401(k) document sponsor.

Regardless of whether the 401(k) plan will save you money when comparing IRA custodian fees to 401(k) maintenance fees, the second benefit will absolutely save you money.

No LLC Requirement

We established that an IRA will have an annual custodian fee.  And, most clients will opt for an IRA LLC as they want checkbook control of their IRA assets.  Well, in order to have this control, they will have to establish the IRA LLC.  As a result of electing the IRA LLC option, the client’s IRA will incur any and all expenses related to the LLC.  In simple terms you will have the cost of creating the LLC ($50 – $800), and your LLC may have annual filing fees due to the state as well.  In the case of LLC fees for one state (not the highest, nor the lowest), the filing fee is $300 to establish the LLC and the LLC has an annual filing fee of $300….folks, sometimes this ain’t cheap!

In contrast, while you can elect a single-member (where the 401(k) plan is the only member) LLC for your Solo 401(k) plan, you do not need it to have checkbook control of your plan’s assets.  Regardless of where you open the account (e.g., bank, financial services company), you will have checkbook control of your account….you do not need the LLC to secure checkbook control.  As you can see, this can save you significant money…money that is not necessarily needing to be spent IF you have the Solo 401(k).

In these first 4 posts, we have outlined the benefits of the Solo 401(k) over the SEP-IRA as it relates to contribution limits, participant loan options, Roth contributions (the Solo 401(k) can makes both pre-tax and Roth in one plan where the SEP can only make pre-tax), and the absence of UDFI/UBIT taxes for real estate investments….plus, possible savings for not needing a custodian nor an LLC for your Solo 401(k).

Gosh, one might think we are done, but we still have one last post on this topic.  I do believe we are beginning to show that the Solo 401(k) has some significant advantages over the SEP-IRA, and should receive serious consideration over the SEP-IRA as the retirement plan of choice for the qualifying self-employed candidate.

As always, the information provided is intended to be educational in nature.  It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice.  One must always consult with their respective professional in all such matters.