Unlike the millions of U.S. workers who have access to 401k plans through their employers, small business owners and self-employed individuals must create their own path to retirement. While IRAs are a plausible option, they carry substantially lower contribution limits. Fortunately, small business owners can still tap into 401(k) benefits by leveraging a one-participant or solo 401(k).
Still, even a Solo 401(k) can limit investment opportunities, potentially leading savvy investors to miss out on high-potential assets like real estate and cryptocurrency.
Fortunately, a self-directed 401(k) account for small business owners allows for expanded asset options, unparalleled investment control, and the potential to earn far more substantial earnings than standard 401(k) accounts or IRAs.
What Is a Self-Directed 401(k)?
A self-directed 401(k) is a retirement plan that allows you to invest in more than just common assets, like stocks, bonds, and mutual funds. Instead, account holders can choose from a range of alternative assets, such as cryptocurrency, real estate, precious metals, private equity, and other assets prohibited in a standard 401(k).
In general, self-directed 401(k)s are available to employees if their employer offers it. On the other hand, small business owners and the self-employed can only tap into self-directed benefits by opening a self-directed solo 401(k) or SIMPLE 401(k). For the purpose of this post, we’ll focus on solo self-directed 401(k)s, which are designed for business owners with no full-time employees other than a spouse
Benefits of a Self-Directed 401(k) for Small Business Owners
Here are just a few of the benefits small business owners can expect from self-directed 401(k)s
Flexibility and diversification
Since a self-directed 401(k) can hold alternative assets, small business owners have the flexibility to build a diverse retirement portfolio that reflects their long and short-term goals while adapting to asset availability, industry insights and investment opportunities.
This flexibility can lead to higher returns and better portfolio diversification, helping business owners maximize their retirement savings while aligning investments with their expertise and risk tolerance.
Higher contribution limits
Self-directed 401(k)s have much higher contribution limits than self-directed IRAs.
According to the 2025 IRS guidelines, 401(k) participants can contribute up to $23,500 annually to their accounts. The IRS also allows for catch-up contributions for participants betwee ages 50 to 59 years up to $31,000. Participants between 60 to 63 can contribute up to $34,000 ($23,500 + $11,250).
Business owners can also contribute as the employer, not just the employee, and the IRS sets aggregate limits for dual contributions.
Solo 401(k) holders under the age of 50 can contribute a combined total of $70,000 if you’re under 50. If you’re 50 to 59 years old, you can contribute $77,500; from 60 to 63, you can contribute a combined total of $81,250.
For comparison, the current annual contribution limit for IRA holders is far lower: $7,000 annually. Individuals 50 and over can still make catch-up contributions, but it only increases the limit to $8,000 annually.
Tax Advantages
Self-directed 401(k)s are tax-advantaged accounts. If you have a Traditional 401(k), contributions are made with pre-tax dollars, and withdrawals are taxed during retirement. Roth 401(k)s are funded with after-tax dollars, and qualified withdrawals are tax-free.
Additionally, depending on the contribution type, investment gains grow tax-deferred or tax-free, enhancing wealth accumulation over time.
Checkbook Control for Faster Transactions
If you open a self-directed 401(k) in the name of an LLC, you can gain checkbook control. Unlike traditional 401(k) plans that require custodian approval for each transaction, a self-directed 401(k) with checkbook control allows business owners to manage investments directly.
Checkbook control will enable you to take advantage of opportunities as they arrive and avoid unnecessary administrative delays that can jeopardize certain investments, like those revolving around real estate or private equity.
Eligibility and Requirements
In general, any legitimate business that earns revenue can open a self-directed 401(k). However, your business structure will determine the type of self-directed 401(k) available to you.
If you are a self-employed individual or a small business owner, you may be eligible for a one-participant or solo 401(k). Under this plan, you must:
- Have legitimate business revenue/self-employment income.
- Have no full-time employees other than a spouse.
- Must file a Form 5500 if your assets exceed $250,000
- Create plan documentation, including an adoption agreement and basic plan document.
- Follow all IRS guidance concerning establishing your business and reporting income.
Steps to Open a Self-Directed 401(k)
If you’re a small business owner or self-employed individual who wants to open a 401(k), follow these steps.
- Choose the Right Plan Provider. Self-directed accounts, including 401(k)s, are only available through IRS-approved custodians. Review available custodians, paying particular attention to fees, reviews, and their experience. If you’re interested in investing in a specific type of asset, it’s a good idea to choose a custodian who has experience working with investments in that particular industry.
- Set up the plan documents. The IRS requires business owners to create a plan adoption agreement and basic plan document. These documents outline the basic plan provisions and the legal and operational rules.
- Select investments. When you invest with a self-directed 401(k), you are responsible for selecting and investing in the assets of your choice. The plan custodian will not offer investment advice or vet a potential opportunity. As such, you must complete due diligence for each investment decision.
- Managing and administering the plan. Once your account is set up, you must track contributions and ensure that all investments align with IRS guidance. In addition, if your account holds more than $250,000 at the close of a year, you’ll need to file a Form 5500-EZ.
Investment Options
A self-directed 401(k) is structured to hold a wide range of alternative assets, including:
- Real Estate, including residential and commercial property as well as raw land, and real estate investment trusts (REITs)
- Private Lending, such as mortgage notes and promissory notes
- Precious metals, such as gold, silver, platinum, and palladium
- Private Equity, including start-ups, small businesses, venture capitalist funds, etc.
- Cryptocurrency, such as Bitcoin, Ethereum, solana and cardano
- Tax liens issued by government entities as a result of delinquent property taxes
- Energy commodities, such as oil, gas, mineral rights, and agricultural investments
Common Pitfalls and How to Avoid Them
Opening and maintaining a self-directed 401(k) has multiple benefits that can help you reach your retirement goal earlier. However, it’s essential to maintain compliance and be aware of circumstances that may require extra attention. Failure to do so can lead to penalties and tax obligations.
Here are some common pitfalls to avoid.
IRS Prohibited Transactions
The IRS has strict rules on how you can use the funds in a self-directed 401(k), and failure to comply with those rules can result in penalties, including the disqualification of the plan. Prohibited transactions include:
Self-dealing and disqualified persons
Transactions cannot directly benefit the account holder or any disqualified persons, including the account holder’s spouse, parents, grandparents, the account custodian, or any entity in which the account holder or a disqualified person has 50% or more ownership.
For instance, account holders or disqualified persons can’t live in a property held in the 401(k). Likewise, the accountholder can’t invest in a business owned by a disqualified person or hire their company to complete renovations on or manage the property.
Other examples of prohibited transactions include extending loans to disqualified individuals or using assets in the 401(k) as collateral for mortgages or other types of loans.
UBIT (Unrelated Business Income Tax) Considerations
Under certain circumstances, your 401(k) can be subject to unrelated business income tax (UBIT). Primarily, this can occur if the account earns income from an active business arrangement, such as through an LLC or partnership.
Fortunately, earnings from real estate held in a self-directed 401(k)s are generally excluded from UBIT under RC Section 514(c)(9).
Record-Keeping and Compliance Challenges
Self-directed 401(k)s are bound by complex IRS rules, and it’s essential that you keep proper records about pertinent transitions, such as contributions, withdrawals, investments and plan expenses. Further, failure to file essential forms, such as IRS Form 5500-EZ, if assets exceed $250,000, can result in penalties or plan disqualification.
Is a Self-Directed 401(k) Right for Your Business?
A self-directed 401(k) may be a good fit if you’re a small business owner or self-employed.
With a self-directed solo 401(k), you can access significantly higher contribution levels than other retirement options, like an IRA. Further, the self-directed designation allows you to invest your funds as you see fit, tapping into alternative and often lucrative assets like real estate and precious metals.
Still, it’s wise to consider the responsibility that comes with a self-directed account. Proper management is essential, including due diligence for each transaction, proper record keeping, and exact adherence to IRS requirements as they relate to both tax reporting and asset procurement.
If you’re a confident investor, this type of account can put you on the fast track to retirement. However, a self-directed account isn’t a great option if you’d prefer a managed account or aren’t comfortable making investment decisions.
Finally, it’s essential to consider your long-term business plans. If you intend to hire full-time employees, you may want to consider a self-directed retirement plan, such as a self-directed SIMPLE 401(k), that accommodates your goals.
FAQs
What are the contribution limits for a Self-Directed 401(k)?
All 401(k)s have a base contribution limit of $23,500 for the 2025 tax year, with additional age-based catch-up contributions. Those from 50 to 59 can contribute an extra $7,500, and those from 60 to 63 can contribute an extra $11,250.
However, business owners and self-employed individuals generally open self-directed solo 401(k)s, which allow for contributions as both the employee and employer. In this case, they can contribute more based on their compensation.
In 2025, the aggregate totals are as follows:
- $70,000 for participants 49 or younger
- $77,500 for participants 50 to 59
- $81,250 for participants 60 to 63
Can I use a Self-Directed 401(k) to invest in real estate?
Yes, you can use a self-directed 401(k) to invest in real estate, though you cannot hold real estate in a standard 401(k). Real estate options available within a 401(k) include residential, commercial, and raw land.
What happens to my Self-Directed 401(k) if I close my business?
If you close your business, you are no longer eligible for a self-directed 401(k), as you no longer earn the qualifying income that made you eligible for the plan. Upon closing your plan, you’ll need to either roll the plan balance into an IRA or withdraw the balance from the account, which may result in significant tax obligations and penalties, depending on your age and the type of account you have.
