A Solo 401(k) Plus an Employer Plan
A Self-Directed Solo 401(k) plan is a fantastic way to save for your retirement future. With a self-directed plan you can protect and grow your nest egg with a wide variety of investment types like real estate, venture capital, and cryptocurrency. You also can build your tax-sheltered retirement savings more quickly than with an IRA thanks to the generous contribution limits that 401(k) plans offer.
Many investors qualify for this powerful tool, but do not realize that they do.
A common misconception is that you can only participate in one 401(k) plan. Well, that just is not true.
If you have more than one job with different employers, then you can participate in the 401(k) – or similar employer retirement plan – offered by each employer.
That means that if you are an employee of a company that offers a retirement plan, and you are also separately self-employed with your own business, you can setup a Solo 401(k).
Solo 401(k) Qualification
In order to operate a Solo 401(k) plan, you need to have some kind of qualifying self-employment. You can be a sole proprietor or setup a business like a LLC or corporation. The format does not matter. Having a for-profit enterprise that generates earned income is the basic requirement.
Your business also needs to be an owner-only operation. If you have any full-time employees working more than 1,000 hours per year, then your business cannot sponsor a Solo 401(k).
Some examples of self-employed activities that could potentially sponsor a Solo 401(k) include:
- Real estate agent
- Freelance writer, designer, or technical specialist
- Artist or craftsperson
- Coach or physical trainer
- Consultant
- Umpire or referee
- Contract medical professional
- Independent sales representative
- Driving or delivery
Employee Contribution Limit
401(k) plans allow for generous contributions from both the employee and employer.
While you can potentially participate in more than one 401(k) plan, you can only contribute up to your individual limit.
As of 2022, that means $20,500 for those under age 50 and $27,000 for those age 50 or older.
Your contributions can be to one plan or both.
Employer Contributions are Independent
While your maximum overall contribution is limited across the plans your participate in, the same is not true of employer contributions.
Your business can make the maximum profit-sharing contribution available based on your business income, regardless of whether your other employer may also be making profit-sharing or matching contributions.
Source of Contributions
Contributions to your own Solo 401(k) must come from your business that sponsors the plan.
If you make $15,000 per year with your side gig and $150,000 in your day job, you can only look to the $15,000 of self-employment earnings to source contributions to your Solo 401(k).
Where to Contribute?
Where to put your contributions merits consideration.
If your employer makes matching contributions, you probably want to contribute at least to the matching threshold. Having someone else contribute to your plan is basically 100% free ROI on every dollar they add.
On the other hand, if investment flexibility is more important to you than the matching amount, you may want to shift more of your contributions to your own self-directed plan.
Future Rollovers
If you ever change your primary job, the 401(k) associated with that employer becomes available for rollover. That means you can then move some or all of that money to your Solo 401(k).
When Having your Own Solo 401(k) Makes Sense
If your main goal is simply to diversify a portion of your existing retirement savings and you have a high contribution 401(k) with your primary employer, then a self-directed IRA is a perfectly good solution.
Following are a few cases where a Solo 401(k) may provide an advantage.
Boost Your Savings Level
Maybe you are early in your career and want to get a jump start on building tax-sheltered savings. Perhaps you need to rebound from a less than optimal start or a hiccup along the way.
If you can put an extra $10,000, $20,000, or more into your Solo 401(k) while also contributing to an employer plan, that can make a big difference.
Tax Reduction
Tax-deferred contributions to your Solo 401(k) reduce your tax burden. If you would rather use your side income to grow your savings than pay more taxes, the Solo 401(k) is the right tool for the job.
Avoid UDFI on Leveraged Real Estate Investments
If one of your investment goals is debt-financed real estate, then the Solo 401(k) has a distinct advantage over a self-directed IRA.
An IRA is taxed on the portion of the gains that it receives based on the borrowed money in a mortgaged rental property or leveraged multifamily syndication.
While the tax an IRA will pay is generally not too bad, paying no tax is always better.
A Solo 401(k) is exempt from taxation on Unrelated Debt-Financed Income when the debt is used for the acquisition of real property.
Don’t Force It
While a Solo 401(k) can have many advantages, there are situations where it may not be the best choice.
If you cease being self-employed, then you no longer have an employer capable of sponsoring your Solo 401(k). That usually means rolling over your Solo 401(k) and any investments in the plan to a self-directed IRA.
If you have a legitimate side business that is something you intend to do for many years, then a Solo 401(k) can work very well for you.
If you are creating some form of self-employment just because you really want to have the Solo 401(k), you may regret that decision a few years down the road.
What that means is don’t setup a side gig just so you can avoid UDFI taxation on a single syndication deal. You’ll probably spend more time, energy, and money maintaining the business than your plan will save in taxes as compared to making that same investment with an IRA.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
