Which is Better: A Self-Directed IRA or 401k?

If you have finally made a wise decision to save up for retirement, your next step would be to choose the retirement plan that would prove to be most beneficial to you. The first question you should be asking yourself is where you want the retirement funds to be invested. If you want to play it safe and just invest in the good old-fashioned stocks, bonds and mutual funds, then 401k is the way to go. If, however, you feel more adventurous and hope to earn higher profits by investing in real estate, gold bullion, or any private business that appears profitable, then you should open a self-directed IRA account. Below are some of the other differences between the two.

Checkbook control

Checkbook control means that the account owner or the investor has complete control over their retirement account and can conduct transactions instantaneously at any time. This is an option only with the self-directed IRA. With a 401k account, the investor will have to rely on their custodian to be available so that the transaction can be reviewed and approved. A fee will be deducted from the account every time a transaction is made. So the more transactions you intend to make within a year, the more a self-directed IRA under the checkbook model would make sense.

Amount of money to work with

The more money you want to invest in a retirement account, the more checkbook control you would need. It seems quite easy to let your funds just sit there in a 401k and allow the slow profits to pile up. But you never know when you might run into a short-lived investment offer that you simply cannot turn down. If you have 401k you would just be standing there in frustration while you wait for your custodian to answer his phone so that your transaction can be approved. With a self-directed IRA, you would have the checkbook in your pocket and therefore be able make the payment.

Borrowing money

A retirement account is meant to be used after retirement, therefore it wouldn’t make much sense to take a loan out of it before the age of 59½. If you do decide to do it for some reason, it will cost you an additional tax amount plus a 10% penalty. With the profits you stand to gain using a self-directed IRA, these penalties can easily be dwarfed. There are no such penalties with the 401k but, as mentioned before, you don’t stand to gain too much profit by investing in stocks, bonds and mutual funds.

Conclusion

It all depends on the amount of money you want to invest and the time you are willing to spend in building up your account. If you want to take up investment just as a hobby, you are better off with a 401k because the profits gained from the traditional investments that the 401k limits you to, you can be satisfied. If you are the more risk-taking type and analysis of businesses is your bread and butter, you stand to gain a fortune by going for a self-directed IRA.

Which is Better: A Self-Directed IRA or 401k?