Self Directed 401(k) – Contribution Types

A self directed 401(k) plan is a retirement plan that specifically addresses the needs of those employees or small business owners who want to invest in avenues that are less explored. A self directed 401(k) gives an investor the power to direct his investment in almost any kind of asset tax-free, at his own discretion, without needing custodial consent. There is wide range of assets that an investor can consider which may include anything from private and publicly held companies, commodities, real estate to private equity and a lot more.

The best part of a self directed 401(k) plan is the high contribution limits that it allows. A participant in a self directed 401(k) can make annual contributions up to $50,000 while those participants who have attained the age of 50 are allowed an additional $5,500 catch up contribution. There are broadly three types of contributions you may make to a self directed 401(k).

Elective Employee Deferral Contribution

As per the new self directed 401(k) contribution rules set up in 2012, a participant below 50 years in age can make a maximum employee deferral contribution to the amount of $17,000. For plan participants over the age of 50, an individual can make a maximum employee deferral contribution to the amount of $22,500

Profit Sharing Contribution

As far as the profit sharing contributions are concerned, a participant can make 25% (20% in the case of a sole proprietorship or single member LLC) of the business profits as contribution. The profit sharing contribution together with the salary deferral contribution should not exceed the permissible contribution limit of $50,000 if the participant is below the age of 50 and $55,500 if the participant has attained the age of 50.

Roth Contributions

A self directed 401(k) plan gives an investor the choice to make both pre tax and Roth (post tax) contributions into one plan. In other words, a 401(k) plan allows participants to elect Roth IRA type tax treatment for a portion or all of their retirement plan contributions. Thus every self directed 401(k) account has a built in Roth sub-account and unlike Roth IRA, contributions are allowed in a Roth 401(k) irrespective of the participant’s modified adjusted gross income (AGI). In the case of a Roth IRA, those employees who earn a modified gross adjusted income of more than $110,000 ($160,000 for married filing jointly) are prohibited from making contributions. An important point to bear in mind is that contributions made into a Roth IRA cannot be rolled over into a traditional 401(k).

By: Rick Pendykoski

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