The Self-Directed Solo 401k Explained

Open a solo 401k plan online in under 10 minutes – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both traditional and alternative assets, take out a loan, or do a mega backdoor Roth conversion with a few clicks.

The IRS lets you invest in almost any asset class with a solo 401k. However, in order to make investments into alternative assets like real estate, crypto, and private equity, you need full checkbook control over your investment account. 

Without a self-directed solo 401k, your investment options are limited to whatever your plan provider offers in their solo 401k plan. These low-fee, generic solo 401k plans are often referred to as “prototype” plans and do not offer many of the benefits and tax advantages that are supposed to come with a solo 401k.

For example, the Vanguard Solo 401k only lets you invest in a selection of Vanguard mutual funds. You can’t invest in individual stocks, crypto, or write checks to invest in property or startups. The Fidelity Solo 401k doesn’t have a Roth option, and you can only invest in things like ETFs, mutual funds, bonds, and stocks.

For a full range of investment options and benefits, you need to look beyond major banks and brokerages. Third party solo 401k plan providers, like Carry, specifically build their plans in order to offer the full suite of benefits that are supposed to come with a solo 401k. These are often referred to as non-prototype plans.

Eligibility of a self-directed solo 401k

The eligibility rules of a self-directed solo 401k is the same as a regular solo 401k. To qualify, you need to meet two requirements:

Any business entity and all income levels are eligible. There are no income limits or restrictions, and you qualify whether you make a few hundred dollars per month with a side hustle, or run a 7-figure business.

Benefits of a self-directed solo 401k

The contribution limits, withdrawal rules, and tax treatments of a self-directed solo 401k are the same as a regular solo 401k. If you’re going to invest with a solo 401k, you might as well take full advantage of all the perks and tax advantages by finding a provider that offers self-directed accounts. In addition to being able to invest in alternative assets, you also get more perks.

Investment freedom

The main benefit a self-directed solo 401k is that you get full checkbook control. Rather than being limited to whatever investment options your provider gives you, you’re free to invest in whatever you like acting as your plan’s trustee.

The IRS doesn’t have an official list of allowable investments for a self-directed solo 401k. Anything goes as long as it’s not a collectible, life insurance, or prohibited transactions with a disqualified person.

Some common investments include:

Roth option

Most prototype plans don’t offer a Roth option. A Roth solo 401k is one of the biggest advantages of having a solo 401k plan in the first place. A Roth solo 401k has no income limits, and has a Roth contribution limit that’s 3x higher than the Roth IRA.

With a Roth option, you get the liberty to choose your tax advantage each year. If your income is too high, and you need a tax break, you can opt to make contributions to your traditional solo 401k. If your tax bracket is on the low end for the year, you could get taxes out of the way now, and opt for Roth contributions to your Roth solo 401k.

Mega backdoor Roth solo 401k

Some self-directed solo 401k plans will specifically be designed to allow for the mega backdoor Roth solo 401k. With a solo 401k, only employee contributions can be made into a Roth account. That gives you a Roth contribution limit of $23,000 ($30,500 if age 50+) for 2024. With a mega backdoor Roth solo 401k, you can contribute up to $69,000 ($76,500 if age 50+) for 2024 entirely into your Roth solo 401k.

In order for it work, your plan provider must offer:

Not every plan provider offers these options as these are specifically used for implementing the mega backdoor Roth. The Carry Solo 401k offers both.

Rollover option

A rollover is one of the fastest and easiest ways to fund a solo 401k. You’re allowed to rollover funds and assets from any retirement plan into a solo 401k. The only retirement plan you cannot rollover to a solo 401k is the Roth IRA.

Some prototype solo 401k plans do not offer rollovers as a funding method, and only let you make contributions to your account. Contributions and rollovers are treated differently by the IRS. If your self-directed solo 401k allows rollovers, you can rollover as much as you want from another retirement plan and it doesn’t affect your yearly contribution limits.

Loan option

Some solo 401k plans will let you take out a loan from your account, without penalties or taxes. The IRS lets plan participants loan up to 50% of your plan value, up to a maximum of $50,000 from your account. Interest rate is Prime Rate plus one or two percent, and you get five years to repay your loan. If you use the money to purchase a primary residence, you can get up to 15 years to pay back the loan.

A solo 401k loan isn’t the best option since you’re depleting your retirement account of money that would otherwise be invested in the market. However, if you’re in urgent need of money, a solo 401k loan can be a more cost-effective option than taking an early-distribution, which would get hit with a 10% penalty plus income taxes.

How to open a self-directed solo 401k

Most solo 401k plans with major banks and brokerages are not self-directed. Your investment options are limited to stocks, ETFs, or mutual funds offered by the provider. If you want a self-directed solo 401k and get full checkbook control over your retirement funds, you need to open your solo 401k with a self-directed plan provider, like Carry.

When you open a self-directed solo 401k, you become the trustee of your solo 401k trust. Your solo 401k trust gets its own bank and brokerage accounts, and you get full control over the checkbook.

If you want to invest in crypto, you would open a new account with a crypto exchange under your solo 401k trust. If you want to invest in real estate, you would write the check and sign the documents, but the property would belong to your solo 401k trust.

The only difference between a regular prototype solo 401k and a self-directed solo 401k is that you get full control over the bank account and the funds and assets. Instead of being limited to investing in whatever options the plan provider chooses, you can invest directly into alternative assets like real estate, crypto, or private equity.

Each solo 401k plan provider is different in the benefits and perks offered, so make sure to do your research on what benefits are most important to you, and which providers offer the best plans that offer them.