Self-Directed Individual 401k Plan: Advantages, Eligibility & Contributions Limits

A Self-Directed Solo 401(k) plan is an IRS-approved and qualified 401k plan. It is designed for a self-employed sole proprietor, a corporation, or a limited liability company. The participant can make contributions as both the employee & the employer; hence can enjoy higher contribution limits.

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History of the Solo 401K

After the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) taking effect in 2002, it became possible for a sole proprietary business to defer more money into a retirement plan cost-effectively than a profit-sharing plan. As such, Solo 401(k) became the most popular retirement plan for the self-employed.

Who is best-suited for a Solo 401K?

A Solo 401(k) plan is ideal for sole proprietors, consultants, or independent contractors. A Solo 401(k) plan offers the same abilities as a Self-Directed IRA LLC, but there is no need for creating an LLC.

Why a Solo 401 K Plan?

You can go for a Solo 401K as it makes it possible for the self-employed to leverage many of the same benefits associated with employer-sponsored retirement plans. If you intend to have more control over your retirement funds, you can choose a self-directed 401K plan.

Self-Directed Solo 401k Eligibility

You need to meet two requirements to be eligible for a Self-Directed Solo 401k plan. The conditions are:

  • The presence of self-employment activity
  • The absence of full-time employees

In this context, you should keep in mind that if you and your spouse are the sole owners of the business, then both of you can contribute the individual accounts within the Self-Directed Solo 401K.

Contributing Limits

The limits of contribution to the account vary depending upon whether you are younger or older than 50. If you are younger than 50 years, you can contribute to a maximum of $57,000 for the year 2020. And if you are 50 and above, you make the extra ‘Catch-up’ contributions of $6,500 per year.

However, there are also additional limits in each role that are within the maximum contributing limit. They are:

  • As the employee, one can contribute up to $19,500 in 2020, or 100% of compensation, whichever is less. And for those 50 or older, can contribute an additional $6,500 during the year.
  • As the employer, one can make an additional profit-sharing contribution of up to 25% of the compensation or net self-employment income (net profit less half the self-employment tax & the plan contributions made for self). The compensation that can be used to factor the contribution is limited to $285,000 in 2020.

Self-Directed Solo 401k Benefits

There is a slew of benefits of a Solo 401K plan. With the plan, you can avail of benefits, such as:

Alternative Investment Options

You can invest in a variety of alternative investment assets, such as:

  • Physical Real Estate
  • Promissory Notes
  • Precious Metals
  • Private Lending, Tax Liens, Cryptocurrency, etc.

Higher Contributions

For 2020: you can make an annual contribution of up to $57,000 per year or $63,500 per year if older than 50.

Easy Administration

The administration is hassle-free and smooth. While you act as the trustee of the plan, the American IRA acts as the record keeper. And at the same time, you need not file any annual taxation for any plan that has less than $250,000 in plan assets. (Note: If your plan has more than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed)

No Need to Establish an LLC

There is no requirement for creating an LLC when you go for a Solo 401K plan as the plan itself can make investments in alternative assets, like real estate.

Three Contributing Sources

You can avail of three contributing sources: Pretax, Roth, or Voluntary After-Tax.

Participant Loans (Tax-Free)

With a Solo 401K plan, you can borrow up to $50,000 or 50% of your account value (whichever is less). And the loan term is 5 Years or up to 15 years for Primary Residence Purchase.

Option to Consolidate Funds

You have the option to transfer former employer funds, IRAs, SEP, and traditional IRAs.

The Self-Directed Solo 401k Set-Up Process

Setting up a Solo 401K is not at all a complicated process. It involves only a simple possess, with six steps:

Understand the Eligibility Conditions

Firstly acquaint yourself with the eligibility conditions. The primary eligibility condition is that you, as the business owner, can only participate as the plan is designed only for a single participant. You will not be eligible for the plan if you have full-time employees who would qualify for a 401(k).

Identify a Provider

Once you have understood the eligibility conditions, you can proceed ahead to identify the right provider of self-directed IRA services. Moderate fees, good reputation, and investment flexibility are the factors you can consider while shortlisting companies.

Complete Paperwork

After that, complete the necessary paperwork with your provider. It will formally set up your Solo 401(k).

Compose Employee Disclosures

As a rule, you need to compose disclosures of certain information about the plan and the benefits of tax-free savings, even if you do not have any employee who can participate in your Solo 401(k).

Open an Account

Subsequently, open and set up your Solo 401(k) account with your provider. Make sure you follow the guidelines in the plan documents. You can open the account any time before the tax-filing deadline.

Make Contributions

Finally, start making contributions after you have set up your Solo 401(k) account. To make things simple, you can schedule automatic, electronic contributions or make a single contribution before your tax-filing deadline.


If you are a self-employed sole proprietor, a corporation, or a limited liability company, do not miss out on the Solo 401K account’s benefits. Get in touch with a reputed self-directed IRA services provider such as NuViewTrust, to set up an account.