A self-directed 401(k) is for people who are self-employed or for small businesses that only employ the owners. It also lets account owners invest in nontraditional assets, such as:
- Tax liens
- Real estate
- Precious metals
- Foreign currency
- Equipment leasing
- Private placements
- Energy investments
Contributing to a Self-Directed 401(k)
With a self-directed 401(k), the account owner can make contributions as both an employer and an employee. As an employee, you can contribute up to $23,000, plus another $7,000 if you’re 50 or older. Determining how much you can contribute as an employer can be complicated. You must calculate your earned income and use a rate table or worksheet to find the allowable contribution rate. However, total contributions cannot exceed $69,000, not including catch-up contributions.
Self-Directed 401(k) Withdrawals and Minimum Distributions
The withdrawal rules are generally the same for self-directed 401(k)s as they are for traditional plans. Most withdrawals before age 59 ½ have a 10% penalty, though there are some exceptions. Starting at age 73, account owners must take required minimum distributions (RMDs) yearly or pay penalties. Whether distributions are taxed depends on the type of self-directed 401(k) plan. Roth 401(k) plans are funded after taxes, so withdrawals are tax-free. Distributions from conventional 401(k) plans are taxed as ordinary income.
However, while account owners may withdraw contributions to a traditional Roth 401(k) at any time without paying taxes or penalties, the rules are different for self-directed Roth 401(k)s. With self-directed accounts, owners can only withdraw contributions without penalties if they are 59 ½ or older and have had the account for at least five years.
Self-Directed 401(k) Rollovers
If a self-employed business owner closes their business, they typically have to terminate the self-directed 401(k) plan. In these cases, it’s usually best to roll over the funds into an individual retirement account (IRA). The easiest option is a direct rollover or trustee-to-trustee transfer, which moves the funds from the 401(k) directly to the new IRA without an official distribution, so you don’t have to pay taxes or penalties.
However, if you receive the money, you can deposit it into another retirement plan within 60 days without it counting as an official distribution. Note that sometimes your account administrator will withhold taxes, and you must replace these funds to ensure you roll over the full amount.
Consider a self-directed IRA if you like having more control over your account or want to continue investing in nontraditional assets.
Self-Directed 401(k) Prohibited Transaction Rules
The IRS prohibits specific transactions in investment accounts, including self-directed 401(k) plans. Prohibited transactions are those between the account owner and a disqualified person, which is someone who has a financial interest in the account or provides services to the account. Besides the account owner, disqualified persons also include:
- Their spouse
- Their parents and grandparents
- Their children and grandchildren
- The account fiduciary
- The plan administrator or custodian
- Any company where the account owner directly or indirectly owns 50% or more of the business
Transactions that involve or benefit disqualified persons are prohibited, as are transactions that include using the account or assets in the account as collateral for a loan. The account owner and disqualified persons are prohibited from using any investment property in the 401(k) for their own benefit. For example, you cannot buy a rental house with your 401(k) and have your parents be the tenant.
Any prohibited transaction disqualifies the 401(k) as a tax-advantaged retirement account, and any disqualified persons who participated in the transaction must pay a 15% tax on the amount involved.
Open a Self-Directed 401(k) With Accuplan Benefits Services
If you’re self-employed, a self-directed 401(k) account can help you plan for the future and diversify your investment portfolio. Accuplan specializes in self-directed accounts and provides the administrative support you need, including record-keeping and tax reporting. You can explore various types of self-directed 401(k) investments, including cryptocurrency, precious metals and real estate. Get started by opening an account or reaching out with any questions.
Our information shouldn’t be relied upon for investment advice but simply for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice.
