BlogWhat is a self-directed 401k Plan?
Posted about 2 years ago

What is a self-directed 401k Plan?

The self directed 401k (aka solo 401k) plan first became available with the passage of the Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) of 2001. The Solo 401k is for owner-only businesses with no full-time W-2 employees, and is designed to invest in both traditional and alternative investments (e.g., cryptocurrency, metals, real estate, notes, tax liens, private equity, etc.), borrow through a participant loan, and maximize all contributions types such as pretax, roth and voluntary after-tax.

Solo 401k Eligibility

While any type of business entity is eligible to open a solo 401k plan, including sole proprietors, partnerships, corporations (both subchapter S and C corporations), and limited liability companies (LLCs), you need to be performing at minimum part-time self-employment activity in order to open and continue with the Solo 401(k) plan, and it has to be active income versus passive investment income. One way to distinguish passive income versus active income is that active income is subject to Social Security taxes whereas passive income is not because it’s considered capital gains income. Visit Here to learn more about the solo 401k eligibility requirements.

Who Can be Excluded

The following employees may be excluded from a solo 401k plan:

  • Employees under age 21;
  • Employees working less than 1,000 hours per year, and as a result do not meet the plan’s eligibility requirements;
  • Nonresident aliens; and
  • Union employees

Contribution Types and Limits

The solo 401k allows for all three contribution sources (i.e., pretax, roth and voluntary after-tax). The rules require each source to be separately tracked. Visit here to learn about the differences and similarities between each source.


Just like traditional 401k plans, owner-only businesses sponsor a solo 401k plan and can process participant loans from the solo 401k plan.

The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.

– Example 1: Solo 401k balance is $50K; 50% of $50K = $25K (the Solo 401k maximum loan amount)

– Example 2: Solo 401k balance is $150K; 50% of $150K = $75K; however, the maximum permitted Solo 401k loan amount is $50K

– The minimum Solo 401k loan amount is $1,000.

Reporting Requirements

Distributions as well as conversions from solo 401k plans are reported on IRS Form 1099-R. The Form 1099-R is generally issued by the solo 401k plan provider or the business owner’s tax preparer.

Form 5500-EZ also must be filed once the fair market value of the plan exceeds $250,000. The deadline to file this form is July 31.

Published in Member Blogs, Solo 401k

Comments ( 3 )

  1. Do you know which brokerages offer the highest level of options trading in a solo 401k? E.g. Etrade only offers selling covered calls (level 0) but nothing else, not even cash secured puts. Ameritrade, on the other hand, I’m told allows cash secured puts, as does Schwab, somebody told me. Are there any brokerages that allow higher level options trading in their solo 401k? Also would trading higher level options trading potentially trigger UBIT? Any detailed answers welcome here.

  2. Our experience has been that TD Ameritrade provides the highest level out of all the brokerage firms. Also, try Options House. and it is done under a “Trust” account umbrella

    Option strategies such as covered calls and covered puts have no margin requirement since the underlying stock is used as collateral. If the solo 401k brokerage account has been approved for margin but the margin account is not being used then Unrelated Business Income Tax (UBIT) would not apply. UBIT is triggered when the margin account is being utilized.

  3. Is there any situation that would allow me to contribute — as the employer — 100% of my w2 income or closer to it? I am filing as an S Corp, if so, this would solve a lot of problems.

    I have over contributed if the 25% of income mark is used for both 2020 and 2021.

    I planned to roll the 2020 overcontribution (just discovered in October) — even then, it is about $6,000 too high based on my income, will I incur and excise tax of 10% on the $6,000 every year??

    Also, I need to remove all of 2021 now. I am simply contacting my B/D to have it removed. Apparently, this is a very rare thing indeed! They are asking for a letter – no form is available. Will I need to break out the growth on these funds as well?? seems so. Thank you for any help!!