Should I Use a Solo 401(k) Instead of a Self-Directed IRA?

Contribution Limits: Advantage Solo 401(k)

If you’re self-employed and looking to maximize contributions, the Solo 401(k) has a clear edge. You can contribute up to $70,000 annually (2025 limits, including employee and employer contributions) versus just $7,000 (or $8,000 for those 50+) to a traditional or Roth IRA. That’s a significant difference for those looking to shelter more income in a tax-advantaged account.

Account Setup and Access: Advantage IRA

On the other hand, if you’ve already built up funds in retirement accounts (like old 401(k)s or IRAs) and want to roll those funds into a new account to start investing, a Self-Directed IRA is typically easier and less expensive to establish. There are fewer administrative requirements and more custodians who offer IRA accounts than Solo 401(k)s.

Leveraged Real Estate? Advantage Solo 401(k)

One of the most significant strategic advantages of the Solo 401(k) comes into play if you’re planning to use debt to acquire real estate. Unlike a Self-Directed IRA, a Solo 401(k) is exempt from the unrelated debt financed income (UDFI) tax on leveraged real estate. That means no UBIT headaches or tax filings on income attributed to debt-financed investments.

Tip: If you’re self-employed and plan to use leverage (debt) in your real estate investments, the Solo 401(k) may provide superior tax efficiency over a Self-Directed IRA.