What Is a Self-Directed 401k?

Will you have enough money in retirement? The Bureau of Labor Statistics found that only 43% of United States workers participate in a retirement savings plan.

What Is a Self-Directed 401k?


This survey was actually specific to plans accessed through an employer. But what do you do if you are or you are self-employed?

If you own a business with just yourself (or you and a spouse), a Solo 401k plan may be an even better solution for you!

401k vs. IRA: What’s the Difference?

401Ks are similar to IRA plans. However, IRA plans are set up on an individual basis and not set-up by an employer. A 401K is set up by an employer.

With both accounts, you will not be taxed on your investment returns while the funds are in the account. But once you retire, you will be taxed on your mandatory withdraw.

Additionally with both, you get to invest with money pre-tax. This means that you’ll be able to invest a greater sum earlier, allowing you to earn more in returns over the years.

Finally, its important to note that Solo 401k’s have MUCH higher contribution limits, when compared to IRAs. A self-employed person can put away up to 57K per year, as of 2021. An IRA maxes out at 9K.

What is a Solo 401k?

A Solo 401k is also known as a self-employed 401k. Full-time freelancers and self-employed individuals are not able to take advantage of a permanent employer retirement plan, so instead that can opt for a solo 401k. (Which is even better!)

Do you have to be completely self-employed to have a self-directed 401k? No. To open a self-directed 401k, you must have earned self-employment income.

This can be attained without being a full-time freelancer, however. (though you may not be able to participate in two plan simultaneously)

And, you will only be able to contribute to a Solo 401k in years where you do have some level of self-employment income.

What Is a Self-Directed 401k?

All Solo 401k’s by default are also “Self Directed”. That means that you have full control over what you invest in.

Most employer-enabled 401k plans only have a small selection of investment options for workers to choose from. This means that an employer has a large say in your investment portfolio.

Individual stocks may not be offered in an employer plan for example. However, with a self-directed 401k plan, your investment options include anything a brokerage house would offer.

Additionally, certain self-directed Solo 401k plans will allow you to invest in “alternative investments” such as real estate, notes, precious metals and even cryptocurrency. If these options interest you, check out MySolo401k. (it’s who I have my Solo 401k with)

For a more in-depth look at choosing potential investments, read more about ways your money can work for you.

If you are confident in your investment skills, having a self-directed 401k is definitely for you. Charles Schwab even saw an 8.7% increase in balances, in self-directed brokerage accounts.

However, if you don’t want to manage the money yourself, you can easily attach an investment manager or robo-advisor to the account to do the investing for you.

Traditional vs Roth

There is one key difference between traditional and Roth IRAs. With traditional IRA plans, you invest funds into the plan pre-tax. This means you do not pay income or other taxes on funds the year you invest them into a traditional IRA.

Sound familiar? This is exactly how 401k plan investment work as well. And similarly, upon retirement when you start withdrawing funds, you will have to pay taxes on the traditional account withdrawals.

Roth IRAs are the opposite in this sense. When contributing to a Roth IRA, you pay taxes on the funds before depositing. However, you will benefit greatly when you retire, and start to withdraw funds, as they will be tax free!

Luckily your Solo 401k can also have a Roth component. So you can chose to invest in one option or the other, or both.

Protecting Your Financial Future

No matter the types of investment plans you choose, it’s important to invest early. The more time your investments have to grow, the more compounding you will get.

Want to protect your future with a self directed 401k and more? Ready to achieve greater peace of mind with advice from an expert? Consider our “Map My Retirement” service package today. Together, we’ll review your investment accounts and more to secure your financial future.

Related Content:

Comparing the SEP IRA vs Solo 401k for the Self-Employed

The Financial Planning Process: How to Mastermind Your Retirement

Jobs That Pay 100 an Hour (or More) and Can Be Done Remotely?

The Financial Independence Mindset is Critical

How Our (Semi-ish) Early Retirement Aspirations Grew from a Spark to a FI/RE

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