March 5


The Self-Directed 401k: What You Need to Know

Self-directed 401ks are becoming more and more popular these days. But what exactly is a self-directed 401k? And why would you want one? This blog post will discuss the basics of self-directed 401ks and what you need to know to decide if this type of retirement account is right for you.

What is Self-Directed 401(k)?

A self-directed 401(k) is a retirement plan for people who own their businesses. This type of account follows the same rules as any other 401(k) plan. The first rule was established in 1981, and the most recent change was in 2001. This change made it easier for people to save money for retirement.

Like a self-directed IRA, a self-directed 401(k) also lets you invest your retirement savings in various ways, such as real estate, private company stocks, money lending, and precious metals.

This plan provides you a lot of flexibility to invest in whatever you want as long as it is legal. You just have to write a check and make the investment. You don’t have to worry about being limited like most people are with their traditional retirement accounts from a brokerage.

Self-directed 401(k)s are ideal for self-employed professionals, contractors, and sole proprietors.

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Self-Directed 401(k) Eligibility Criteria

To open a self-directed 401(k), you must have some taxable income from self-employment during the current financial year.

  1. You are responsible for your income, not your employer. This includes people who own their own businesses, work freelance, or are independent contractors.
  2. You must have earned income that can be verified by looking at your tax records.

How Does Self-Directed 401(k) Work?

There are two forms of self-directed 401(k)s. One type is where you have limited control over what you can invest in. The other type, a true checkbook controlled self-directed 401(k) plan, is where you have more control over what you can invest in.

Some financial institutions can help you open a new self-directed 401(k). But be careful – they might only let you invest in their products. If you have a self-directed 401(k) (the kind we set up), you can invest in many different things.

You can invest in normal things, like stocks and bonds, but also in alternative investments like real estate or small businesses. You have a lot of freedom to choose what to do with your money. This is how self-directed 401(k) works:


If you don’t have a company, SD Retirement Plans can help you create one in the state of your choice.


We’ll prepare the plan documents and file them with the IRS.


You can roll over your IRA financial or 401(k) to a self-directed 402(k). This will let you invest in different types of things, like real estate. You can also just contribute a standard IRA/401K contribution.


You can invest in alternative assets, including real estate, a small business, or private placements.

How to Setup Self-Directed 401(k)

There are three primary ways to fund your self-directed 401(k): transfers, personal deferrals (contributions), and profit-sharing.


You can transfer money from other types of self-directed retirement accounts, like 401(k)s, SEP IRAs, SIMPLE IRAs, and Traditional IRAs. But you can’t transfer Roth IRA funds.


Personal deferrals are based on a person’s age. If someone is younger than 50 years old, they can defer up to 100% of their self-employed income, which is $20,500 for 2022 ($19,500 for 2021 and 2020). For people more than fifty years old, there is an additional catch-up contribution limit of $6,500 for the year 2022 ($6,500 for 2021), which brings the maximum contribution limit to $27,000 (up from $29,000).


The self-directed 401(k) plans established can also be called PSPs or profit-sharing plans. The IRS publication 560 shows the specific amount of profit-sharing allowed and includes a step-by-step worksheet. In broader terms, the profit-sharing can be up to 25% of the sponsoring entities’ profit.

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A self-directed 401(k) allows you to invest in a lot of different options, like Real Estate – homes or businesses – rentals, foreclosures, raw land, Tax Liens, Precious Metals, Private equity Placements, Foreign Currency, Hard Money Lending, and more.

Benefits of Self-Directed 401(k) Plan

If you contribute money to these plans, the earnings on that money will be tax-deferred until you take it out. Your sponsoring business can also get benefits from contributing to these plans.

You can choose to make voluntary contributions from your salary. Your employer can make contributions on your behalf.

In the tax year 2022, you can choose to defer up to $20,500 (up from $19,500 in 2021) or most of your earnings yearly (whichever is less), with catch-up contribution limits of $6,500 once you’re older than fifty years old.

You have much more control over your investments when you use a retirement plan. You can choose where to invest your money from any of the options offered.

A self-directed 401(k) plan provides investment advice options, including mutual funds, stocks, bonds from different companies, exchange-traded funds that track the stock market, and investments like real estate.

You can use a self-directed 401(k) to invest in real estate and other non-traditional investments. This can allow you to make more money than people who don’t have a self-directed 401(k).

If you are experienced in investing, you can use your skills with a 401(k) plan. You can’t do this with a traditional 401(k) plan.

You can be strict when choosing investments because there are many different choices. This will help you make better investments.

If you can stay calm when the market is changing, you can take advantage of a self-directed 401(k) opportunities. This puts you in a better position than people who invest in mutual funds managed by someone else.

Self-Directed 401(k) Rules

401(k) Contribution Limits

The IRS reviews and adjusts the total contribution limits for 401(k) plans each year. Check to see the updated 401(k) contribution limits.

Disqualified persons

A disqualified person has a financial interest in the retirement plan or who is providing services to the plan. The IRS also considers you, the 401(k) account holder, as a disqualified person. This means you cannot use your investments or other investments to benefit you.

Also, you cannot use your real estate investment as collateral for a personal loan. People who are not allowed to own your IRA account are your parents, spouse, children, grandparents, grandchildren, and their spouses.

Also not allowed are your account administrator or account custodian, your account beneficiary, and any company wherein you own at least 50% of the voting stock (directly or indirectly).

Prohibited Transactions

A self-directed 401(k) is not permitted to make many kinds of investments or conduct transactions according to IRS rules. Some examples are:

  • Direct or Indirect Lending of Money
  • Plan participant loans fund to his wife or son.
  • Father authorizes a loan guarantee for the Solo 401(k) Plan.
  • Having a Transaction with a Disqualified Person
  • Plan participant purchases part of a business owned by his Father.
  • Plan participant buys a condo and lets the daughter live there.
  • Receiving Direct or Indirect Perks of the Plan
  • Plan participants will receive a commission for selling a property to the plan.
  • Plan participant purchases a property and charges a management fee.
  • Plan participant “fixes” a property himself rather than paying a 3rd non-disqualified party.

401(k) Distribution Rules

The rules for taking money from your 401(k) are the same as for any other 401(k) plan.

Self-Directed 401(k) Rollovers and Withdrawals

If you take money out of your self-directed 401(k) before you reach the age of 59 1/2, you’ll have to pay 10% of the amount taken out. There are some exceptions, but most people will have to pay this penalty.

If you want to roll over a self-directed 401(k) to an IRA, you have 60 days. If you don’t do it in 60 days, the money you took out of your 401(k) becomes taxable. Your brokerage that hosts your IRA can help you make a direct, penalty-free, and tax-free rollover. You might also consider rolling over your self-directed 401(k) to a self-directed IRA, giving you much more control over your investments.

You can use a self-directed Roth401k to move your money into the program. You can put in an unlimited amount of money this way. You will need to talk to a tax attorney to ensure it is done correctly. This can help save on taxes and with your estate planning.

Self Directed 401k

A Self-Directed 401K is a retirement account specifically for businesses with only the owner, their spouse, and business partners working there.

Assume you are a corporation, a partnership, or a sole proprietorship. In that case, you can use a self-directed 401K. The requirements for making contributions to a Solo 401K are that you get paid wages or salary.

The business must not have any employees other than the spouse of the plan holder or the business partners.

You can make high 401K contributions if you meet the IRS qualifications. You might also be able to get a tax deduction.

What Are “Alternative Investments”?

Self-directed IRAs are similar to other IRAs. They offer tax advantages to encourage people to save for retirement. However, there are some differences. For example, IRS rules state that an IRA can be invested in some alternatives to stock and bond funds.

As of 2021, the IRS permits people to invest in real estate, development land, promissory notes, tax lien certificates, precious metals, cryptocurrency, water rights, mineral rights, oil, and gas. Using their self-directed IRAs.

Additionally, the IRS maintains a list of prohibited investments. Among the items in this list are collectibles, art, antiquities, stamps, and rugs.

Who Wants a Self-Directed IRA?

For any of a variety of reasons, an investor may be attracted to a self-directed IRA (SDIRA):

  • Splitting your retirement savings between a regular IRA account and a self-directed IRA account could help you to diversify your portfolio.
  • Some people might choose to invest in real estate to avoid the stock and bond markets after getting burned in the 2008 financial crisis.
  • Some people might be interested in investing in a particular type of thing, like cryptocurrencies or precious metals.

A self-directed IRA is the same as any other IRA regarding taxes. Suppose you have a strong interest in precious metals. In that case, you can invest pre-tax money for an extended period in a traditional IRA. You will only have to pay taxes on the funds when you retire.

The self-directed aspect of an IRA might appeal to the independent investor. This means that the investor makes all the decisions about buying and selling. Still, they need to name a qualified custodian or trustee to act as administrator. If they don’t do this, their IRA won’t meet the IRS definition of an IRA.

The administrator is usually a company that sells or invests in houses.

Risks of a Self-Directed 401(k) or IRA

A self-directed retirement account enables you to exercise control over the way your retirement assets are used. This is a viable choice for folks who are confident they can manage their money more effectively than professionals. However, there are risks involved.

The Securities and Exchange Commission of the United States has warned investors in self-directed IRAs that they may be duped or face exorbitant costs. The performance of these investments can also be very unpredictable.

People who invest also have to be careful not to break complicated IRS rules when they invest money. Some of these rules specifically say that you can’t invest in:

  • Receiving money from an income-producing property in the IRA or 401(k) is a good way to save money.
  • You can use real estate that you own to back a personal loan.
  • Using property or other investments in the account in a way that benefits you personally
  • To repay personal loan obligations or lend to a disqualified person, you may withdraw funds from your account.
  • Permitting persons who have been disqualified from living on a property owned within the 401(k) or IRA
  • Selling or leasing property within the account to a disqualified person

A disqualified person works for or helps the plan, like your spouse and heirs, account beneficiary, account custodian, or plan administrator. And any company you own at least 50% of the voting stock.

Suppose the IRS determines that you have participated in a prohibited transaction. In that case, your account will automatically lose its tax-advantaged status. All the money you have invested into a self-directed 401(k) or traditional IRA will be treated as taxable income, leaving you with a big tax bill.

Pros of Self-Directed 401(k) Plans

Self-directed 401(k) plans have many benefits as traditional 401(k) plans. They both allow you to save money before taxes are taken out. This means that you will pay fewer taxes on the money you make. Both types of 401(k) plans also have the same contribution limits and rules for withdrawals and rollovers.

There are some excellent reasons to choose a self-directed 401(k) over a traditional 401(k). For example, you have more control over your investments with a self-directed 401(k). You aren’t limited to the choices that your plan administrator makes.

Another pro of self-directed 401(k) plans is that you have more investment choices. With a traditional 401(k) plan, you are limited to funds that someone else has made. But with a self-directed 401(k) plan, you can invest in anything from stocks and bonds to real estate and tax liens.

Cons of Self-Directed 401(k) Plans

You may have to pay more fees with a self-directed 401(k) because you can choose your own investments. But this also means that you can invest in stocks, which may give you a better return than if you decided mutual funds or index funds. However, you need not trade too often, reducing your overall profits.

It takes a lot of knowledge to do well with a self-directed 401(k). Professional fund managers don’t even always do better than index funds. Index funds just try to copy what is happening in the market. Even if you know a lot about investments, do you have enough time to manage your retirement plan? Many busy individuals would benefit from investing in certain low-cost index funds that they can simply set and forget.

Why Are Mutual Funds the Most Popular 401k Investment Option?

Mutual funds are a common choice for many 401k plans. However, there are a few reasons why they are often chosen over other investment options.

  • They just don’t know – Many financial advisors and 401k plan trustees do not know that they can offer investments other than mutual funds. The investing public must be educated on the 401k plan’s additional investment alternatives. Lack of knowledge of all 401k options is a significant reason why mutual funds are usually given.
  • Easy to manage and easy to understand – Mutual funds are the most popular type of investment. They are easy to understand, and many people already know about them. This makes them a good choice for investments. Some requirements make it easier for companies to offer mutual funds to their employees.
  • Herding Behavior – People are influenced by what other people do. This is called the herd mentality. People feel safer when they act like others, so most 401k plans offer mutual funds as the primary investment choice.
  • Easy to hide fees and costs – Many mutual fund share classes are set up specifically for 401k plans. These share classes have a fee structure that lets the trustees decide how to pay for the costs of the 401k plan. The trustees may pay for the charges out of the company’s cash flow or request payment from the employees in part or in full. Before 2012, employees were mostly unaware of their retirement plans cost. That changed when the Department of Labor published a new regulation that required plan fees to be disclosed to participants. This way, employees know what the fees are being used for.
  • Lack of knowledge – Many people are not very good at investing. People have known this for a long time, but now there is proof. A study shows that people in charge of company plans do not know how to pick good investments. Even if the investments themselves are not good, people feel more comfortable picking them because they have been around for a long time. This is a big problem for people who do not have a lot of knowledge about investments or do not have a financial advisor to help them out.
  • Self-interest – Some brokers and financial advisors make more money if they don’t tell people about all the fees they charge. They can get away with this because, in the past, there was no rule saying that they had to tell people about all the fees. The costs of a 401k plan can be wrapped up in a package and presented as a whole. In 2012, the law was amended to require that individuals with 401k plans be informed of the fees and the purpose they are being charged. When individuals wish to establish a new 401k plan or make modifications to an existing one, their broker or financial advisor may frequently recommend a bundled plan.

Tips for Getting Retirement Ready

  • There are many different types of retirement savings accounts. If you’re not sure which one is right for you, ask a financial advisor. SmartAsset offers a complementary tool that assists you in locating up to three advisors in your area. You can conduct an interview with each of them to ascertain which one best fits you. If you are prepared, immediately contact an advisor.
  • Start saving for retirement as soon as you can. It is usually good to begin saving sooner, whichever retirement savings account you choose. The sooner you invest, the more time compound interest has to work. This can significantly impact the amount of money you save for retirement.

Frequently Asked Questions about Self Directed 401k

Can I move my managed 401K into a self-directed 401K?

You can roll cash from your 401(k) into a self-directed IRA when you reach the age of 59 1/2. But your employer can choose not to let you take the money out while you are still working there.

Can I contribute to 401K independently?

You can contribute to your solo 401(k) in two ways. You can choose between a traditional plan or a Roth plan. Each has its own tax advantages.

Is a self-directed 401K the same as a solo 401K?

A Solo 401k Plan includes both an employee and profit-sharing contribution. This is different from a Self-Directed IRA, which can only have a lower annual contribution limit. A Self-Directed IRA allows an individual to contribute up to $6,000 or $7,000 if the individual is at least age 50.

How is a self-directed 401K taxed?

When you pick a self-directed option, you will have all of the traditional benefits that a 401(k) plan offers. Contributions are tax-deferred, meaning that taxes are not due until the funds are withdrawn from the tax-advantaged account.

How do I rollover my 401k to a Solo 401k?

Usually, your custodian or plan administrator will send you a check with your retirement funds. You have 60-days to deposit those funds into your Solo 401k account.

Can I have a Solo 401k and employer 401k?

The solo 401k allows you to pay yourself twice. You can be the employer and the employee. The “employee” contribution is limited to $19,500. The “employer” portion is again limited to 25% of compensation. Your total solo 401k limit will be 25% of compensation or $58,000, whichever is lower.

What is Solo 401k for self-employed?

A self-employed 401(k)—also called a solo-401(k) or an individual 401(k)—is a special savings option for business owners who do not have any employees (apart from a spouse). In many ways, the self-employed 401(k) works the same way as a standard 401(k).

How much can I contribute to my Solo 401k?

As of 2019, self-employed individuals can contribute a maximum of $56,000 to a solo 401(k). If the individual is 50 or older, they can add an extra $6,000 per year in “catch-up” contributions. This brings the total contribution to $62,000. (The amounts are higher for 2020.)

Can I contribute 100% of my salary to my 401K?

In 2019, you were able to contribute a maximum of $19,000 to a 401(k). If your company’s 401(k) plan has a lower limit, this amount may be less. However, if you are considered a highly compensated employee, the IRS may limit your contribution.

Is a solo 401K better than an IRA?

A solo 401(k) may offer more money than you can put in each year for self-employed people. You might also be able to get an unrelated business income tax deduction for the money you put in. Solo 401(k) plans also let you make Roth contributions, which means that the money you save will not have to pay taxes when you take it out.

Does a self-directed 401k need a custodian?

You need to use an IRS pre-approved document when you establish a solo 401k. This makes the process more expensive than if you used an IRA. Our fee for a self-directed and self-trusted solo 401(k) is $995 with Atty consultation or $495 for the plan only. An IRA must have a third-party custodian involved in order to set it up.

How are Solo 401k contributions reported to IRS?

The IRS Form W-2 documents the wages you earned as an employee of the company. Your personal contribution to the Solo 401k should be reported in Box 12 on your W-2. Box 12 can contain several types of compensation or reductions from your taxable income.

Are self-directed IRAs safe?

When choosing investment advice for your Individual Retirement Account, it is essential to be aware of the risks involved, including fraudulent schemes, high fees, and volatile performance. By investing in a self-directed IRA financial, you can gain access to a broader range of investment options, but you should be mindful of these risks before making any decisions.

How Much Can You Put in a Self-Directed 401k?

The maximum contribution for a self-directed 401(k) plan is $18,500. Participants 50 years of age and above may give an additional $6,000 to the fund. Each year, the contribution limitations are reviewed and modified.

Where Can I Open a Self-Directed 401k?

You can currently find self-directed retirement accounts at most financial institutions. These accounts offer you many choices, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and index funds.

Is a Self-Directed 401k the Same as a Solo 401k?

A Solo 401(k) plan allows employee and profit-sharing contributions. A Self-Directed IRA’s annual contribution maximum is much lower.

Is a 401k Better Than an IRA?

The 401(k) is better to save for retirement than an IRA. The employer-sponsored plan lets you save more money – $20,500 compared to $6,000 in 2022. Plus, if you’re over age 50, you can save even more money – $6,500 compared to $1,000 in the IRA.

Who Qualifies for a Solo 401k?

A Solo 401(k) retirement plan is different from a regular 401(k) plan. It can only be used by self-employed people or small business owners who do not have other employees. They also must not be employed by a company they or their spouse own.

Is a Self-Employed 401k a Defined Contribution Plan?

An independent 401(k) is a retirement plan set up by people who own small businesses or are the only employees of their business. The rules for independent 401(k)s are generally the same as any other 401(k) plan.

How Does a Self-Directed 401k Work?

With a self-directed 401(k), you can choose the investments you want. You can pick mutual funds, stocks, and bonds that you think will do well. You can even invest in real estate and commodities if your employer allows it.

Is a Solo 401k Tax Deductible?

One of the Solo 401(k) benefits is choosing when to deal with your tax obligation. In a Solo 401(k), any contributions you make as the “employer” will be tax-deductible (subject to IRS maximums) for your business. The earnings from these contributions will grow tax-deferred until they are withdrawn.

How Does a 401k Work for the Self-Employed?

The self-employed 401(k) is like a standard 401(k). People save money from what they earn before taxes. That money can grow without having to pay taxes. People can take it out when they are retired.

Do I Need Ein for Solo 401k?

To contribute to a Solo 401k, you need to get an Employee Identification Number (EIN) from the IRS. This is like your business’s social security number. You can apply for one online at the IRS website.

To learn more about Investment Options, click here.

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