The Self-Directed Solo 401k Explained

A Solo 401k doesn’t have to be limited to mutual funds. With a self-directed Solo 401k, you may be able to invest in almost any asset type allowed under IRS rules, including real estate and private funds, so long as you avoid prohibited transactions and collectibles. 

Features like Roth or after-tax contributions, participant loans, or direct check-writing depend on your plan document rather than a single IRS rule. Big brokerages usually restrict options to their own offerings, but some third-party providers, such as Carry, offer plans with broader features. 

Read on to understand how these plans work and what you might consider before picking one.

Eligibility for a Self-Directed Solo 401k

The eligibility criteria for a self-directed Solo 401k generally match those of a traditional Solo 401k. You need to meet two main requirements:

✅ You must have some form of earned self-employment income. 

✅ You cannot have employees who meet the long-term, part-time rule, which is typically 500 or more hours in each of two consecutive years beginning in 2025. A spouse is excluded from this rule.

Almost any business entity and income level may qualify. There are no set income limits, so eligibility can extend from someone earning a few hundred dollars through a side hustle to an owner running a seven-figure business.

✏️ Hypothetical Example: 

A freelance graphic designer with no employees who earns $20,000 a year from client projects may qualify for a self-directed Solo 401k as long as they meet the self-employment income requirement and do not have staff crossing the long-term, part-time threshold.

Benefits of a Self-Directed Solo 401k

A self-directed Solo 401k keeps the same contribution limits, withdrawal rules, and tax treatments as a standard Solo 401k. The key difference is flexibility. It can give account holders more ways to direct investments and potentially expand their portfolio beyond traditional asset classes.

Investment Freedom

Self-directed plans typically give you direct account control (sometimes called “checkbook control”) through a plan-trust bank account.

✅ You (or another trustee) may direct investments as permitted by the plan document and IRS prohibited-transaction rules.
✅ The IRS does not provide an official list of approved investments. Generally, many asset types are possible except collectibles and prohibited transactions with disqualified persons.
✅ Life insurance can only be held as an incidental benefit in a qualified plan.

Common examples of investments include:

Roth Option

Many Solo 401k plans, including one-participant plans, offer a Roth (designated Roth) option if allowed by the plan document. A Roth Solo 401k has no income limits on contributions.

✅ This lets you choose between Traditional Solo 401k contributions for tax-deferred growth or Roth Solo 401k contributions for tax-free qualified withdrawals.
✅ Switching between Traditional and Roth contributions each year may help you adjust to changes in your income or tax bracket.

Mega Backdoor Roth Solo 401k

Some self-directed Solo 401k plans are designed to enable the Mega Backdoor Roth strategy. Under SECURE 2.0, employer matching or nonelective contributions may be designated as Roth if the plan allows (see IRS Notice 2024-2).

For this to work, the plan must:

📝 Note: The IRS limits annual additions under Section 415(c)  to $70,000 for 2025 (excluding age-based catch-ups). To make “all-Roth” amounts, after-tax contributions must be moved to Roth via an in-plan Roth rollover (IRS Notice 2014-54).

📌 Not every plan provider offers these options because they are specific to implementing the Mega Backdoor Roth. The Carry Solo 401k offers both.

Rollover option

Rollovers are a common way to fund a Solo 401k quickly. Most plan or IRA types can roll into a 401k if the receiving plan accepts them (see the IRS rollover chart).

✅ Contributions and rollovers are treated differently by the IRS.
✅ The only retirement plan you cannot roll over into a Solo 401k is a Roth IRA.
✅ Some prototype Solo 401k plans may not allow rollovers at all.

Loan Option

Some Solo 401k plans permit loans without triggering penalties or taxes. The IRS typically allows borrowing up to 50% of the account balance (capped at $50,000) at a reasonable interest rate. Repayment is usually within five years (longer if used to buy a primary residence).

📝 Note: A Solo 401k loan can be a less costly option than an early withdrawal with a 10% penalty plus taxes, but it also removes money from your investment pool, which can impact long-term growth.

How to Open a Self-Directed Solo 401k

Most Solo 401k plans from large banks or brokerages are not self-directed. They typically restrict investment choices to stocks, ETFs, or mutual funds offered by the provider. To gain more flexibility, including direct account control, you need to open your Solo 401k with a self-directed plan provider, such as Carry.

When you open a self-directed Solo 401k:

✅ You or another person/entity may serve as trustee, as outlined in the plan document.
✅ Your plan trust may open bank or brokerage accounts if permitted under the plan.
✅ Direct account control depends entirely on the provider and the plan document.

If you plan to invest in real estate, you would sign the purchase documents and issue checks, but the property itself would belong to your Solo 401k trust. This structure allows your retirement account—not you personally—to hold title to the asset.

Prototype vs. Self-Directed Plans

Differences between “prototype” and “self-directed” offerings come from plan-document features rather than the label. Examples include after-tax contributions, Roth options, loan features, or the ability to open a trust bank account.

✅ A prototype plan typically limits you to the investments the provider selects.
✅ A self-directed plan lets you invest directly into alternative assets such as real estate, startups, private companies, and private funds.

📝 Note: Each Solo 401k provider sets its own rules and features. Before signing up, review what benefits matter most to you and confirm which providers actually offer them.

Wrapping It Up

A self-directed Solo 401k can provide more flexibility than standard plans, but the real value depends on how well it matches your goals and risk tolerance. 

Before opening an account, review the plan document carefully to understand which features are available, such as Roth contributions, loan options, or the ability to invest in alternative assets. It may also help to compare providers based on the level of control, support, and fees they offer rather than focusing on the label alone. 

Taking time to research can help you use the plan’s features more effectively and stay within IRS rules.

📌 Looking to invest in alternative assets with a Carry Solo 401k? Here’s a guide to getting started.

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Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

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