Which Self-Directed Retirement Plan is Best for Me? Part II [CHECKLIST]
Our first article of the series “Which Self-Directed Retirement Plan is Best for Me” addressed overviews of two plans, self-directed IRA custodian and checkbook IRA LLC, to provide insight about the types of available plans. This is the second and final article in the two part series that will focus on the solo 401(k) and business funding IRA retirement plans.
Solo 401(k)
A Solo 401(k) is similar in many respects to the IRA LLC. You as the investor will operate out of a bank/brokerage account of your choosing and will have signing authority. The key difference is the back end retirement plan and how it functions.
A 401(k) is an employer sponsored retirement plan. A business establishes a 401(k) as an employee benefit. The Solo 401(k) is a simplified implementation designed for owner-only businesses. Because there are no non-owner employees participating in the plan, the plan administration is greatly simplified.
As a qualified employer plan, a 401(k) has much more generous contribution limits than most IRA plans. While a traditional or Roth IRA is capped at $6,000/$7,000 depending on whether one is under 50 years old or 50 and above, a Solo 401(k) can accept contributions up to $57,000/$63,500.
Unlike IRA’s, 401(k) plans offer a participant loan feature, meaning that you can borrow from the plan on a limited basis. This can be handy for starting a personal business.
On the investing side, the 401(k) has an advantage for those investors looking to use leverage such as a mortgage when purchasing plan assets. An IRA is subject to taxation known as UDFI on the portion of income derived from debt financing. A 401(k) is exempt from this tax.
A 401(k) is a specialized form of trust, and you as the self-employed business owner serve as the trustee. As such, you have direct control over the plan funds, without the need to establish a self-directed IRA custodial account or form a LLC. In states with high LLC fees, this can be a significant cost savings each year.
If you and your spouse are both employed by your business, you can both participate in the Solo 401(k) plan.
While tax deferred retirement savings such as a Traditional, SEP or SIMPLE IRA, or an old 401(k) can be rolled over into a new Solo 401(k), there is no ability to accept existing Roth IRA funds. The Solo 401(k) does, however, have the ability to accept new contributions with Roth tax treatment, and you can convert traditional funds rolled into the plan to Roth status.
Not everyone can take advantage of all these great features of the Solo 401(k) however. This plan is only available to self-employed participants with no full time employees working more than 1,000 hours per year. Even if you have such a business, if you or your spouse have a separate business with employees, you may not be eligible for the 401(k). If you are self-employed, but nearing full retirement, the Solo 401(k) might not be the best choice, as it will have to be shut down when the business activity ceases.
Business Funding IRA
The Business Funding IRA is an entirely different format from the 3 plan types covered previously. While those plans are designed for arm’s length investments and provide tax sheltering for the income from such investments, the business funding IRA is designed to allow you to function as an owner-operator of your own business and draw a salary.
The plan itself is not actually an IRA, though it can be funded from an existing IRA or 401(k) account. The business funding platform is comprised of a subchapter C corporation in which the company profit sharing plan can make an employee stock option purchase (ESOP). Basically, your retirement plan becomes a shareholder of the corporation, and the capital can be treated like any other shareholder capital for purposes such as starting or acquiring the business, purchasing inventory, advertising, employee salaries, etc.
While there are no taxes or penalties associated with transferring an existing retirement plan into this format, the business itself will operate in the taxable realm.
For those individuals wanting to pursue the dream of owning their own business, this can be a great opportunity.
This plan is not designed for engaging in passive investments such as rental real estate. The business must be an active endeavor providing a service or product, for example.
Because of the cost and complexity of this program, a minimum investment of $100,000 is recommended.
Summary
A self-directed IRA, checkbook IRA or solo 401(k) program can be a great way to diversify your retirement portfolio into non-traditional assets such as real estate. Finding the right plan for you depends on your situation and goals. Be sure you consult with experts to determine the best solution for your needs. For those individuals looking to own and operate their own business, and fund that business with existing retirement savings, the Business Funding IRA presents a great opportunity suited for this unique purpose.
Contribution limits on this page are current as of the 2020 tax year.
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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.
