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Self-Directed 401(k) & IRA Retirement Plans

Updated: Jun. 09, 2022By: Amanda Reaume

Self-directed 401(k) and IRAs are two types of self-directed retirement accounts that allow investors access to a wider variety of investment options when saving for retirement.

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Self-Directed Retirement Account Definition

A self-directed retirement account is a type of retirement account where the account holder has access to more variety of investments than a traditional retirement plan. This allows investors to customize their holdings according to their preferred investment strategy and risk tolerance.

With self-directed accounts, plan holders can often choose from things like real estate and even cryptocurrencies. Investors who hold these accounts control, not just which assets to invest in but when they want to buy or sell them.

The benefit of self-directed retirement accounts is that they allow individuals to customize their retirement plans according to their risk tolerance and asset preferences, and to also speculate in a retirement account. The downside is that managing a self-directed retirement account is often a lot more work than other plan options and requires an investor actively monitor their account.

People who have self-directed retirement accounts have to carefully ensure that they are managing their risk exposure to ensure that they aren’t taking on too much. For that reason, there could be more investment risk to having a self-directed retirement account versus another type of retirement account where rebalancing and managing risk is done by professionals.

Most financial institutions that offer retirement accounts have self-directed options. Like other retirement accounts, self-directed retirement accounts offer tax advantages to encourage individuals to save for retirement.

What Is a Self-Directed 401k vs. Self-Directed IRA?

Self-directed 401ks and self-directed individual retirement accounts (IRAs) are both tax-advantaged retirement savings accounts that let investors choose and actively manage a wide selection of investments from asset classes not typically available to those investing in retirement accounts. In both types of accounts, money grows without taxation until retirement.

The main difference between the two accounts is that a self-directed 401k is an account that an employer sponsors whereas a self-directed IRA is an account that the plan holder establishes on their own.

With a self-directed 401k, the account holder contributes to the account using before tax income taken off their paycheck. Those funds then grow tax-deferred until retirement when they can be withdrawn and are then taxed. This often allows workers to save more towards retirement during years when they have a high marginal tax rate. When they retire, their withdrawals and then often taxed at a much lower marginal tax rate since they are likely to be in a different income bracken in retirement. There are also Solo 401ks, which are individual 401k accounts designed for business owners without any employees.

With a self-directed IRA, the investor has the choice to open an account as a traditional IRA or as a Roth IRA. With a traditional IRA, the account holder contributes income after it is taxed but can claim their IRA contributions on their tax return to get a tax refund. Similar to a 401k, their funds grow tax-sheltered until retirement and are taxed when they are withdrawn. With a Roth IRA, contributions are made after-tax, grow tax-sheltered, and then can be withdrawn tax-free in retirement.

Tip: An individual can have both a self-directed 401k and a self-directed IRA. They just need to make sure they stay within the total annual retirement account contribution limit.

Who Can Open a Self-Managed Individual Retirement Account?

Almost anyone can open an IRA. Self-directed IRAs are available to people who are self-employed, people who work for employers that offer them a plan, or people who want to rollover existing retirement accounts into a self-directed IRA.

If a self-employed investor wants to open a self-managed individual retirement account, they have to find a qualified financial institution to act as the custodian or trustee of their account and make asset and security purchases on their behalf.

While many financial institutions offer self-directed retirement accounts, an investor might need to shop around to find one that offers the type of investments that they’re interested in.

Some employer plans offer a self-directed option which means that the plan administrator will act as the custodian or trustee. However, not all plans offer that option.

How To Self-Manage a 401(k) or IRA

Want to self-manage a 401k or IRA? Here are some tips to doing so well:

Step 1: Manage Contribution Limits

The first step to managing a self-directed retirement account is to ensure manage the contribution limits. In 2022, investors can contribute up to $19,500 to their IRA or 401k plans. If they are 50 or over, they are also eligible for catch-up contributions up to $6,500 per year.

Step 2: Diversify and Balance Assets

Investors in self-directed retirement accounts have the freedom to choose their asset mix and investments themselves, but that freedom comes with the responsibility to diversify and balance their investments to ensure they aren’t overexposed to any industry. That means coming up with an investment strategy that ensures that their funds are invested in a number of different kinds of industries and investments in line with their risk tolerance. It’s important to also rebalance the account at regular quarterly intervals.

Step 3: Get the Help of a Professional Advisor

A plan trustee or custodian is not allowed to give investment advice to investors in self-directed accounts, but that doesn’t mean they can’t access professional advice. Self-directed investors can enlist a financial advisor to help them make decisions about how to invest their funds.

Step 4: Lending Possibilities from a 401k or IRA

Regular IRAs cannot be used to make loans but self-directed IRAs and 401ks sometimes allow investors to make loans to certain qualified persons including the investor, their spouse, their children, or their parents. Loans can be made to invest in real estate, land, small businesses, or for other limited uses. However, just because the rule exists doesn’t mean investors should use it. Before deciding to lend out money from a self-directed account, investors should do their research – making the wrong move could mean that the IRS becomes involved and the investor loses the tax advantages on their account.

Step 5: Consider Setting Up a Self-Directed 401k

Investors who have a self-directed 401k can establish a Solo 401(k) LLC to manage their retirement savings. Essentially, an investor sets up an LLC owned by their IRA or 401(k). The investor doesn’t own the LLC themselves.

Existing retirement accounts can even be rolled into the self-directed LLC. Why would investors do this? It allows them to access higher contribution limits of $54,000 or more with no need for a custodian or trustee. That means that investors don’t have to pay fees or abide by institutional imposed limits on what kinds of assets to invest in within their retirement account

Advantages & Disadvantages of Self-Administered Retirement Accounts

Whether a self-administered retirement account is right for an investor will depend on their particular situation and their comfort and facility with investing. Here are some pros and cons to a self-administered retirement account:


  • More control over investments and buy/sell decisions
  • Access to more asset classes
  • Great for experienced investors
  • Same contribution limits and benefits as other retirement accounts
  • Potential for higher returns


  • More work to actively manage it
  • Potential for greater losses due to increased risk
  • Must be actively rebalanced
  • High fees
  • Potential to accidentally violate IRS rules

Takeaway: A transaction in a self-directed account that violates IRS rules could lead to the account losing its tax-protected status.

How To Roll a 401k to a Self-Directed IRA

Completing a rollover from a 401k to a self-directed IRA is simple. A rollover simply refers to the act of moving funds from one qualified retirement account to an IRA. Here are three ways to accomplish this:

  1. Direct rollover: Ask the plan administrator to disburse funds from a retirement account or an IRA to a self-directed account after you leave the company.
  2. Trustee to trustee rollover: Ask the financial institution that holds your retirement fund to transfer the funds to a self-directed account.
  3. Indirect rollover: The investor asks the plan administrator to disburse the plans directly to them. The investor then has 60 days to deposit the funds into another plan

Self-Directed 401k & Real Estate Investing

While many people believe that you can’t use a 401k to invest in real estate, there are a few exceptions. To invest in real estate, an investor must have a self-directed 401k and be either self-employed, employed but generating income through self-employed work, or a small business owner with no employees.

To do this, an investor needs a Solo 401k. They can then use the funds in that account to invest in domestic or foreign real estate investments including land, a residential home, a commercial property, apartments, real estate loans, and tax deeds. Investors use their 401k as leverage to take out a non-recourse loan to purchase property.

Bottom Line

Self-directed 401ks and IRAs are retirement investment options particularly attractive to savvy investors who want more control over their retirement savings and more options when it comes to the types of assets they can invest in. However, they require more work and more careful risk management.

This article was written by

Amanda Reaume profile picture
Amanda Reaume has been writing about retirement, investing, and financial planning for over a decade. She has been published in USAToday, Time.com, Yahoo!Finance, Business Insider, Forbes, and Fox Business. She is a former credit expert at Credit.com and wrote a book about financial planning and investing aimed at millennials.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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