Self Directed 401(k)s

A self-directed 401k puts you in the driver's seat.

  • Invest in a wide range of investment options through a self directed brokerage account at any financial institution of your choice
  • Reduce your taxable income with traditional or Roth options
  • Get access to funds through a loan option
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A self-directed 401(k) can be opened by self-employed sole proprietors or may be offered by an employer.

This type of 401(k) plan empowers participants with a wider range of investment options than what is typically seen with 401(k)s. Rather than choosing pre-designed packages, you can select your own stocks, bonds, and mutual funds, and invest in unconventional assets like commodities, tax liens, and real estate.

While self-directed 401(k)s offer great flexibility and choices, there are still some limits and prohibited transactions. As a 401(k) plan provider and administrator, Ubiquity can help you navigate the world of self-directed 401(k)s, whether you’re a self-employed individual or a participant in an employer-sponsored plan.

What Is a Self-Directed 401(k)?

Like a traditional 401(k), the self-directed 401(k) allows workers to save for retirement while deferring income taxes on their contributions and earnings until withdrawal. Penalty-free distributions can be taken as early as 59.5 or as late as 72.

Employees can invest up to $23,000 in their retirement savings in 2023. Employers can also make contributions to bring employee account balances up to a maximum of $69,000 per year. Savers who are age 50 or older can contribute an extra $7,500 in catch-up contributions.

What makes self-directed 401(k)s unique is the ability to invest in real estate, notes, foreign currency, precious metals, and private businesses. By contrast, most employer-sponsored 401(k)s are drawn up to only allow the choice of pre-approved stocks, bonds, mutual funds, and CDs.

When employers agree to sponsor a plan, they act as fiduciaries of the plan, which brings a set of legal liabilities for the plan’s overall performance. If the employer convinces employees to spend on poor investments where everybody loses money, plan participants could sue the business. For this reason, employers may try to steer investors away from riskier choices, though the recommended investments may also not reap as many gains.

Self-Directed Solo 401(k)s

If you are self-employed, you can open a self-directed solo 401(k) for yourself and make contributions as both the employee and the employer. As the employee, you can put up to $23,000 into a Solo 401(k). As the employer, you can invest an additional 20 or 25% (depending on your business entity status) up to the maximum of $69,000 for 2024. If you’re age 50 or older, you can put in another $7,500.

With a solo 401(k), you’ll enjoy full investment choice and total checkbook control, so it’s as easy as writing a check or making a debit from your plan account to invest in everything from real estate and tax liens to precious metals and foreign currency to stocks and bonds. You can act as trustee and participant if you desire, or you can ask Ubiquity to manage contributions, loans, distributions, and IRS filings.

Should You Participate in a Self-Directed 401(k) Plan?

If you are seeking next-level investing, then the self-directed plans offer exciting choice and flexibility. It’s possible to delve into a self-directed 401(k) with the assistance of a plan provider, financial consultant, certified professional accountant, tax attorney, broker, or fiduciary who has pledged to act in your best interest and provide sound financial advice.

Benefits of a Self-Directed 401(k)

  • Invest in residential or commercial real estate.
  • Buy or fund a business.
  • Put money into intellectual properties.
  • Invest in gold and silver.
  • Buy up loans and make money on interest.
  • Act as a trustee to exercise checkbook control over your plan’s monies.

Potential Pitfalls of Self-Directed 401(k)s

  • Beware of fees that may come with certain types of investments.
  • Frequent trading of stocks can eat into your overall rate of return.
  • Self-directing funds requires a certain amount of investing knowledge and expertise.
  • It takes time to make the best decisions for yourself.

If you’re exceedingly busy or new to investing, you may not want the responsibility of managing a complex mix of funds in a self-directed 401(k) plan. For many people, the prepackaged options are good enough to start seeing returns and compounding interest.

Self-Directed 401(k) Rules

Making a prohibited transaction can cause all your investments to suddenly become taxable, resulting in a hefty bill, so you’ll want to be sure you’re aware of what is or isn’t allowed with a self-directed 401(k) account.

  • You cannot make any exchange, lease, payment, sale, or transfer between 401(k) funds and a disqualified person (spouse, parent, grandparent, child, grandchild, or spouse of these individuals). In other words, you can’t let relatives live in a property owned by your plan, invest in relatives’ businesses, or complete any transaction that benefits your family members.
  • You are also a disqualified person, so you cannot purchase real estate with 401(k) funds that you intend to use as a primary residence for yourself. You also cannot use your account as loan collateral.
  • You cannot exceed the IRS contribution limits for the year.
  • You cannot take early distributions before age 59.5 (without paying a 10% penalty, plus income tax).
  • If you leave your job, you must rollover your 401(k) to a new plan within 60 days to avoid taxation.

How to Set Up a Self-Directed 401(k)

If you earned taxable compensation during the current year, you are eligible to open a self-directed 401(k). If you work for yourself, you’ll need to set up a business entity: a sole proprietorship, an LLC, an S-corp, or a C-corp. Then a retirement plan provider can create plan documents and file them with the IRS.

If you have other monies in IRAs or 401(k)s, you can roll them over. Then you are free to invest as you see fit. With an online 401(k) provider, the whole process can be completed in as little as 15 minutes.

Where to Find Self-Directed 401(k) Providers

Ubiquity specializes in easy, affordable, web-based retirement plans geared toward the self-employed and small businesses. For more than 20 years, we’ve led the industry with low-cost, flat monthly rates on 401(k) plans, with no hidden fees based on the size of your balance or company. Additionally, we offer live customer support, optional form-filing services, and hassle-free conversions to full-service plans.

We have helped over 100,000 savers contribute more than $3 billion since 1999. Contact us to take your retirement planning to new heights.

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Talk to Sales
Schedule a Free Consultation

Contact Support
Visit our Help Center
6am–5pm PT / 9am–8pm ET

© 2024 Ubiquity Retirement + Savings
44 Montgomery Street, Suite 300
San Francisco, CA 94104