The Ins and Outs of the Self-Directed Solo 401(k)

The Ins and Outs of the Self-Directed Solo 401(k)

When most people hear about 401(k) plans, they probably think about work. It is typically associated with benefits when you are a W2 employee. But the truth about 401(k) plans is that they can be used by a wide variety of individuals, including people who run their own businesses. That is where the Self-Directed Solo 401(k) plan comes in. This is an IRS-approved, qualified 401(k) plan that is as legitimate as any other, and especially available for people with self-employment status as a sole proprietor, corporation, or as a limited liability company.

But what does it mean, exactly? How does a Solo 401(k) plan differ from what many of us know as the 401(k), if at all? And how can people use the Self-Directed nature of their own independent Solo 401(k) plan to set aside money for retirement?

The Characteristics of the Solo 401(k) Plan

The 401(k) plan is a before-tax retirement contribution account, which means that qualified contributions will be tax-deductible, reducing the overall tax liability for an individual doing everything the right way. For that reason, its high contribution limits are an appealing factor for people who want to put aside a lot of money for retirement, especially before-tax money. That is an incentive built into the Solo 401(k) plan that many people enjoy, particularly people with higher incomes who have more disposable money to put toward retirement.

However, like any before-tax contribution, it is important for investors to know their own situation. As American IRA is not an accounting firm and not a financial advisor, it is not up to us to tell individuals how to use the Solo 401(k) plan. But we can point out how the account is structured, and why many investors turn to it when investing in their own self-directed retirement plan.

The high contribution limits and the tax incentives are two primary reasons. In fact, many people who own their own business are often attracted to accounts like the SEP IRA or the Self-Directed Solo 401(k) plan because of the high contribution limits involved. However, keep in mind that the Solo 401(k) plan is different from, say, a Roth IRA, which uses after-tax money to grow in a retirement plan.

What About Self-Direction?

Self-Directing means that you are taking matters into your own hands, often through a Self-Directed IRA administration firm like American IRA. What does this entail, exactly? Essentially, you need to work with someone to act as the custodian on the account in order to execute certain transactions and paperwork. However, working this way does open all sorts of possibilities for investing beyond the usual assortment of stock and bond funds. In fact, investors using a Self-Directed Solo 401(k) can theoretically invest in real estate, precious metals, private notes, private companies, and more. It is really up to the individual investor and making sure that the retirement investment doesn’t run afoul of the IRS limits.

There are certain limitations to these rules. For example, when investing in precious metals, not all gold coins would be considered permissible retirement investment assets. And investors cannot put retirement money into collectibles such as art and wine.

However, with a Self-Directed Solo 401(k) plan, investors do have access to a wider variety of potential investments, which is appealing for many investors who want to construct a well-diversified retirement portfolio. Ultimately, with self-direction, the power is in the hands of the investor. And with an account like a Solo 401(k), they can use that power to put aside money with higher contribution limits than what many people associate with retirement accounts.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at

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