How a self-directed Solo 401(k) plan works and how to set one up

How a Self-Directed Solo 401(k) plan works and how to set one up

A Solo 401(k) may be the best way any individual with self-employment income (whether you are self-employed full-time or have a side hustle) can invest  - so will you go the standard route or self-directed?

Confused by the options? You’re in the right place.

The decision as to whether to go self-directed or not is critical, so don’t skip it out of convenience. Not every Solo 401(k) provider offers a self-directed plan, so read on to learn more about why this matters and where you can open a self-directed Solo 401(k).

Self-directed plans are for investors looking for more control, flexibility, and options in what they can invest in. Many individuals want to invest in investments they understand and may even be experts of. This makes a self-directed Solo 401(k) plan the perfect choice for a solopreneur (full-time or part-time) looking for the flexibility to invest in real estate, notes precious metals, or the next Facebook.  You are no longer just limited to securities like mutual funds and ETFs.  In a self-directed plan, the provider does not offer investments. Instead, you get to choose the investments you choose to hold under your plan. 

What are the different types of Solo 401(k) plans?

Like an employer-provided 401(k), a Solo 401(k) plan allows you to save for your retirement, invest, and reduce your taxable income. 

A Solo 401(k) is a retirement plan geared specifically toward the unique needs of self-employed individuals and micro-business owners. You can learn more about the eligibility requirements of a Solo 401(k) in this guide. 

Solo 401(k) plans can be broken down into two categories:

• Self-directed Solo 401(k) plans 

• Non-self-directed Solo 401(k) plans 

Self-directed plans afford more flexibility as to what you can invest in (more on that later), while non-self-directed plans limit what you can invest in. Plans offered by the “big” providers will limit you to investments they make money on such as a selection of mutual funds, ETFs, stocks, and bonds (more on them a bit later).  Instead, self-directed administrators only make their money on the documents needed to establish the plan, record-keeping services, and possibly custody services. So you always know how much and what you are paying for. 

What does “self-directed” mean?

Self-directed means that you have more control and a wider range of options to invest in. 

Traditional Solo 401(k) plans limit what you can invest in, whereas a self-directed plan does not (as long as the investment is allowed by the IRS). 

For those looking for:

• More control over what they invest in

• More flexibility to invest in alternative investments

• The ability to diversify beyond stocks and bonds

• Interest in a particular type of investment (crypto or real estate, for example)

A self-directed Solo 401(k) plan is the right choice for you. Check out our complete guide to what you can invest in with a Solo 401(k) for more information.

With more control comes more freedom to make errors if you do not allocate your investment correctly or maintain compliant records of your transactions. Because of this, you must choose a provider that makes it simple to manage your plan and maintain compliant records (more on this later when we break down the best self-directed Solo 401(k) providers).

What can’t you invest in with a Solo 401(k)?

We just established that a self-directed plan allows you a wider range of investment options, but does that mean everything?

No. There are limits, even with a self-directed plan. The Internal Revenue Code 4975-prohibited transactions prohibit plans that are self-dealing. Since the investments in the plan are tax-favored, meaning tax on earnings is tax-deferred and could even be tax-free depending on the type of contribution.  This means that transactions must be arms-length types of transactions. Of course with some exceptions.  

The plan should not interact with disqualified persons - this covers any type of transaction with an ancestor (such as a parent or grandparent), lineal descendent (such as a child or grandchild), or individual connected to the Solo 401(k) account itself such as an investment advisor. Essentially, you need to ask if you or a disqualified person benefit directly or indirectly from the transaction, if the answer is “yes” it’s better to avoid it.  The repercussion is taxation on the amount that was prohibited.

Even with these limits, a self-directed Solo 401(k) plan offers a world of possibility than a more restrictive plan.

How a self-directed Solo 401(k) plan works

A self-directed Solo 401(k) plan works just like any other Solo 401(k) plan except for the fact that you get more customization and control over what you invest in. 

To open a Solo 401(k) plan you will first need to create an account with the provider you choose, and you’ll need your personal info handy including your name, address, contact information, and an EIN (employer identification number).

In the SEPira(k) platform, you have a much broader set of assets that you can invest in as well as dictate how you invest in them. The SEPira(k) platform supports any type of asset that you wish to invest in, including:

• Real estate- Single family, multi-family and commercial

• REITs

• Non-publicly traded stocks

• Tax liens

• Private Placements

• Raw land

• Notes- Secured and Unsecured

• And more!

Along with a host of more “standard” options such as stocks, bonds, mutual funds, and ETFs.

For instance, suppose you wanted to purchase a single-family home using your plan. The investment name will be recorded under the name of your Solo 401(k) to make any income from that property tax-deferred. The SEPira(k) platform gives you the full flexibility to not only hold title on that investment but also use the different buckets available under your plan to purchase the property:

Not only does this give you the flexibility to choose what you can invest in, but the SEPira(k) platform also gives you the flexibility to choose the breakdown of your investments, as well as a fully compliant record-keeping solution to ensure that you are keeping track of your investments correctly based on the Internal Revenue Code.

Failure to comply with administering a Solo 401(k) plan properly could jeopardize the tax-favored status of your Solo 401(k). The term for this is an operational failure, and if an operational failure is not corrected this will disqualify the plan.

Thanks to the SEPira(k) platform, allocating your investments while maintaining compliant records is as simple as clicking a few buttons.

Do the big 401k providers offer a self-directed Solo 401(k)?

If you had a 401(k) plan through your full-time job, then chances are it was with one of these providers:

• Fidelity

• Principal

• Vanguard

• Merrill Edge

• Charles Schwab

They are a logical first choice however while the big providers may offer convenience they also come with limits. For one, Principal does not offer a Solo 401(k) plan, and while the other providers earn top marks in reviews they limit what you can invest to stocks, bonds, and select mutual funds and ETFs. 

If you want a self-directed Solo 401(k), you’ll need to look beyond the provider you may have had through your full-time job and explore some of the top platforms we picked below.

What are the best self-directed Solo 401(k) platforms?

When it comes to setting up a self-directed Solo 401(k) plan, you have some options to choose from. Here are our top three picks.

SEPira(k)

The SEPira(k) platform is a fantastic option for solopreneurs looking for the perfect balance of easy-to-use and the full flexibility that comes with managing a self-directed Solo 401(k) plan. 

Not only does the SEPira(k) platform allow you to manage what you invest in and how you invest, but it also boasts features such as:

• A record-keeping solution that will help you manage your Solo 401(k) in compliance with the IRS

• Support for Roth contributions and after-tax contributions

• Unlimited participants (Owners, spouses, partners, and their spouses)

• Separate accounting of contribution sources “buckets” - pre-tax deferrals, designated Roth deferrals, profit sharing, rollovers, and others

• Documentation storage

• The ability to take a loan from your Solo 401(k) plan at any time and pay it back over time- loan servicing

• IRS Forms - 1099-R, 5500-EZ preparation

• World-class financial education is available in our learning center. 

See how the SEPira(k) platform stacks up against other self-directed Solo 401(k) providers.

The SEPira(k) platform is the best companion for a solopreneur looking to save for retirement and protect their wealth for their future and the next generation. Sign up and create an account today.

Rocket Dollar

Rocket Dollar is a popular Solo 401(k) platform that, like SEPira(k) allows you to self-direct your Solo 401(k). 

Like SEPira(k), Rocket Dollar boasts features like:

• Online document storage

• A dashboard to track your investments

• Roth contributions

• Email support

Rocket Dollar comes in at a lower cost than the SEPir(k) platform as their plans start at $15/month after a $360 setup fee, however with the lower monthly cost comes fewer features. 

Rocket Dollar does not have a record-keeping solution which makes it much more difficult and time-consuming to stay compliant with the IRS. Rocket Dollar also charges for extra participants (such as a spouse or business partner) while SEPira(k) allows extra participants at no cost.

Naber’s Group

Naber’s Group is another popular Solo 401(k) platform that, like SEPira(k) and Rocket Dollar supports self-directed contributions. 

Naber’s Group leans into simplicity. They offer one tier of plans at $99 per month with a $499 setup fee. Like Rocket Dollar, Naber’s Group offers a self-directed Solo 401(k) giving you control over where and how you invest, along with good support and a community. 

However, like Rocket Dollar Naber’s Group does not offer a record-keeping solution, which means staying compliant and keeping your records straight for the IRS will be a manual and time-consuming challenge.

Take control of your Solo 401(k) with SEPira(k) today

Whether you are self-employed full-time or building a business on the side, a Solo 401(k) plan is a fantastic way to increase your retirement savings and plan for the future while providing a host of other benefits.

For solopreneurs (whether full or part-time) looking to maximize their savings, reduce their taxable income, and have control over how they invest, then a self-directed Solo 401(k) plan on the SEPira(k) platform is an excellent option.

Not only will you get a platform that allows you to fully manage your Solo 401(k) and get access to loans, but you’ll also gain access to a support network and premier educational content that will give you the know-how you’ll need to manage your account and save. 

Create an account today and start saving your way.