Table of Contents
- What Is a Self-Directed 401(k) Account?
- Who Is Eligible for a Self-Directed 401(k)?
- How to Set Up a Self-Directed 401(k)
- Pros and Cons of Self-Directed 401(k)s
- How Much Money Can be Put in a Self-Directed IRA?
- Common Self-Directed 401(k) Investments
- Investments That Aren’t Allowed Under Self-Directed 401(k) Plan Rules
- FAQ
Self-directed 401(k) accounts aren’t as common as traditional 401(k) plans, but they can be of interest to DIY-minded investors.
Self-directed 401(k) plans — which may be employer-sponsored or available as a solo 401(k) for self-employed individuals — expand account holders’ investment choices, giving them more control over their own retirement plans. Instead of being limited to a packaged fund, an investor can choose specific stocks, bonds, mutual funds, and possibly even alternative investments, in which to invest their retirement money.
Key Points
• Eligibility for a self-directed 401(k) requires taxable income and employment by a company offering the plan or being self-employed with no employees except a spouse.
• Setting up a self-directed 401(k) involves establishing the account and then funding it by transferring funds from another 401(k) or IRA, using funds from a company received through profit-sharing, or making direct contributions.
• Benefits of a self-directed 401(k) include more investment options, tax deferral, potential employer matching, and potential diversification with alternative assets.
• Drawbacks include higher risks, especially with alternative assets; higher fees; and significant time spent managing the account.
• Prohibited investments are real estate with family ties, loans to family members, and transactions offering investment benefits beyond returns.
What Is a Self-Directed 401(k) Account?
The key promise of self-directed 401(k) plans is control. They allow retirement plan savers to basically act as managers for their own retirement funds.
A self-directed 401(k) plan offers expanded investment choices, including stocks, bonds, funds, and cash, and potentially alternative investments like real estate investment trusts (REITs) and commodities, if the plan allows for these alternative investments.
For a plan holder who believes they have the investment know-how to leverage better returns than a managed 401(k) or target-date fund, a self-directed 401(k) may be an appealing choice.
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Who Is Eligible for a Self-Directed 401(k)?
As long as your employer offers a self-directed 401(k), and you have earned taxable income for the current calendar year, you can enroll.
Alternatively, if you are self-employed and own and run a small business alone, with no employees (aside from a spouse), and your business earns an income, you are also eligible. You can search for a financial institution that offers self-directed plans, which might include a solo 401(k).
This is one of the self-employed retirement options you may want to consider.
How to Set Up a Self-Directed 401(k)
Setting up a self-directed 401(k) plan can be fairly straightforward. Once a 401(k) or solo 401(k) account is established, individuals can fund it in the following ways:
• Plan transfer. Funds can be shifted from previous or existing 401(k) plans and individual retirement accounts (IRAs). However, Roth IRAs can’t be transferred.
• Profit sharing. An employee receiving funds from a company through profit sharing can use that money to open a self-directed 401(k) plan — up to 25% of the profit share amount.
• Direct plan contributions. Any income related to employment can be contributed to a self-directed 401(k) plan.
Recommended: How to Manage Your 401(k)
Pros and Cons of Self-Directed 401(k)s
Like most investment vehicles, self-managed 401(k) plans have their upsides and downsides.
Pros of Self-Directed 401(k) Plans
These attributes are some of the self-directed 401(k) plan advantages:
• More options. Self-directed 401(k) plans allow retirement savers to gain more control, flexibility, and expanded investment choices compared to traditional 401(k) plans.
• Tax deferral. Like regular 401(k) plans, self-directed 401(k) plan contributions and asset gains are tax-deferred.
• Employee matching. Self-directed 401(k) plans allow for employer matching contributions, potentially paving the way for more robust retirement plan growth.
• Plan diversity. Account holders can invest in assets not typically offered to 401(k) plan investors. This potentially includes alternative investments like REITs, precious metals like gold, silver and platinum, and private companies, depending on what the 401(k) plan allows, thus lending additional potential for diversity to self-directed 401(k) plans.
Cons of Self-Directed 401(k) Plans
These caveats and concerns are most often associated with self-directed 401(k) plans:
• Higher-risk investments. Historically, alternative investments come with more volatility — and hence more risk — than stocks and bonds.
• Diversification is on the investor. You’ll need to choose among stocks, bonds and funds to augment your self-directed 401(k) plan asset allocation.
• Higher fees. Typically, self-directed employer retirement plans cost employees more to manage, especially if an investor makes frequent trades.
• Larger time investment. Since self-directed 401(k) plans offer access to more investment platforms, savers will likely need to spend more time doing their due diligence to research, select, and manage their plan options, especially in the area of risk assessment.
How Much Money Can be Put in a Self-Directed IRA?
The amount an investor can contribute to a self-directed IRA is the same as the amount that can be contributed to a traditional IRA account. The annual contribution limit is $7,000 for tax year 2025. Those 50 and older can contribute an additional $1,000 to a self-directed IRA, for a total of $8,000 per year.
For a self-directed 401(k), the amount that can be contributed is the same as the contribution limits for a traditional 401(k). For 2025, the limit is $23,500. Those 50 and older can make an additional catch-up contribution of up to $7,500, for a total of up to $31,000. In 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500), for a total of $34,750.
Recommended: Guide to Self-Directed IRAs
Common Self-Directed 401(k) Investments
The ability to choose from an expanded list of investment categories may be an intriguing benefit for a 401(k) plan holder who believes they have the investment know-how to leverage better returns from those investments.
However, the key is understanding what potential opportunities and what risks certain self-directed investment vehicles bring to the table. Here’s a closer look at two alternative investments that may be offered by some self-directed 401(k) plans.
Real Estate Investment Trusts (REITs)
Through a REIT, individuals with a self-directed 401(k) plan can potentially invest in residential or commercial properties with the goal of income generation — without having to actually buy property. A REIT is a company that owns and maintains different types of properties; investors can buy shares in the REIT.
Examples of properties that might be in a REIT include:
• Apartment buildings
• Hotels
• Office buildings
• Single-family homes
• Shopping malls or other retail centers
• Storage facilities and warehouses
• Health care facilities
REITs can be publicly traded or private. To invest in a publicly-traded REIT with a self-directed 401(k) plan, an investor would use their 401(k) funds to purchase shares in the REIT. The REIT would then pay out dividends on the income collected through rent, mortgages, and so on. REITs are required to distribute at least 90% of its taxable income to shareholders each year as dividends.
An investor might also choose to invest in REIT mutual funds or REIT exchange-traded funds (ETFs). These vehicles can provide ways to diversify holdings.
However, REITs come with risks. For example, they can be affected by fluctuations in the real estate market, such as falling property values or reduced occupancy demand. In addition, when interest rates rise, REIT prices may drop, which could lower the value of the investment. Individuals with a self-directed 401(k) should fully research and understand the risks of investing in a REIT.
Precious metals
Investing in certain precious metals like gold, silver, and platinum may be allowable with some self-directed 401(k) plans. However, these precious metals must meet specific requirements by the IRS — including purity standards and storage restrictions — to be held in a self-directed 401(k). Self-directed 401(k) plan participants may be able to invest in precious metals more easily via stocks or certain commodity funds — but again, only if their plan allows such investments.
It’s essential to remember that precious metal investing can be high risk, since gold, silver, and other metals can be highly volatile in value. Potential investors would need to be well prepared for that kind of risk.
Investments That Aren’t Allowed Under Self-Directed 401(k) Plan Rules
While there are a number of different types of investment vehicles that are included in many self-directed 401(k) plans, regulatory rules do prohibit specific investment activities tied to several of those asset classes. The following investment strategies and associated transactions, for example, would not pass muster in self-directed 401(k) plans.
Real Estate With Family Ties
While investing in REITS may be allowed in some self-directed 401(k) plans, using real estate for extended personal gain is not allowed. For example, that could include buying an apartment and allowing a family member to live there, or purchasing a slice of a family business and holding it as a 401(k) plan asset. Neither of these scenarios is allowed under 401(k) plan regulatory rules.
Loans
Self-directed 401(k) plan consumers may not loan any plan money to family members or sign any loan guarantees on funds used in a self-directed 401(k) plan.
No Investment Benefit Beyond Asset Returns
Self-directed 401(k) plan holders cannot earn “extra” funds through transactions linked to plan assets. For example, a plan holder can invest in a REIT under 401(k) plan rules (as long as their plan allows for it) but they cannot charge any management fees nor receive any commissions from the sale of that property.
Basically, a self-directed 401(k) plan participant cannot invest in any asset category that leads to that plan participant garnering a financial benefit that goes beyond the investment appreciation of that asset.
The Takeaway
While self-directed 401(k) plans can add value to a retirement fund, self-directed retirement planning is not for everyone.
This type of account typically requires more hands-on involvement from the plan holder than a traditional 401(k) fund does, and it may incur more fees. Additionally, investing in alternative investments comes with higher risk, which may not be suitable for some investors. Another type of retirement account may be a better option in this case.
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FAQ
What is the difference between an individual 401(k) and a self-directed 401(k)?
A self-directed 401(k) gives account holders more investment choices, as well as more control over their own retirement plans. Instead of being limited to a packaged fund as they would be with an individual 401(k), an investor can choose specific stocks, bonds, mutual funds, and potentially even alternative investments (depending on what the plan allows), in which to invest their retirement money.
Can I roll my traditional 401(k) into a self-directed 401(k)?
Yes. You can shift funds from a previous or existing 401(k) plan or individual retirement account (IRA) into a self-directed 401(k). The exception to this is a Roth IRA, which can’t be transferred.
How is a self-directed 401(k) taxed?
Like regular 401(k) plans, all self-directed 401(k) plan contributions and asset gains are tax-deferred until withdrawn. With self-directed 401(k)s, there is a 10% tax penalty for early withdrawals (before age 59 ½), the same as with traditional 401(k)s.
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