Self-Directed Solo 401k vs. Self-Directed IRA


Both the self-directed solo 401k and the self-directed IRA fall under the retirement accounts classification of the internal revenue code (IRC) which, among other things, means they are both afforded tax favored status.

What is a Self-Directed Solo 401k?

Besides having the option to self-direct it, a solo 401k plan is a defined contribution plan that covers only an owner (or owner and spouse) or partners (or partners and spouses).

What is a Self-Directed IRA?

IRA is an acronym for individual retirement arrangement for an individual’s benefit. The IRA can be self-directed similar to the solo 401k plan but self-employment income is not required in order participate in an IRA.

Self-Directed Solo 401k vs the Self-Directed IRA

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities:

  • Both were created by congress for individuals to save for retirement;
  • Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds;
  • Both allow for Roth contributions;
  • Both are subject to prohibited transaction rules;
  • Both are subject to federal taxes on the pretax funds portion at time of distribution;
  • Both may be invested in annuities;
  • For both, creditor protection is based on the participants state of residence not under federal law;
  • Both allow for nondeductible (after-tax) contributions;
  • Both are disallowed  from investing in collectibles (e.g., artwork, rugs, antiques, gems, stamps, alcoholic beverages, etc.; and
  • Neither may be invested in your own Retirement funds business startup.

The Self-Directed IRA and Solo 401k Differences:

  • In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
  • To open a self-directed IRA, self-employment income is not required;
  •  A limited liability company (self-directed IRA LLC) is used in order to gain checkbook control over the self-directed IRA;
  • The solo 401k allows for checkbook control so an LLC is not required;
  • The solo 401k allows for personal a loan known as a solo 401k participant loan;
  • It is prohibited to borrow from your own IRA;
  • The Solo 401k may be invested in life insurance;
  • A self-directed IRA is disallowed from investing in life insurance;
  • The solo 401k allows for high contribution amounts (for 2020, the solo 401k contribution limit is $57,000 or $63,000 if age 50 or over, whereas the self-directed IRA contribution limit is $6,000 or $7,000 if you’re age 50 or older);
  • The solo 401k business owner can serve as trustee of the solo 401k;
  • The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
  • When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
  • The self-directed IRA is not subject to upfront federal tax withholding;
  • Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250,000 as of the end of the plan year (generally 12/31);
  • When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
  • Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 4a and 4b of Form 1040;
  • Pre-tax IRA contributions on reported on line 19 of Schedule 1, which is an attachment to Form 1040;
  • The tax deduction of pre-tax solo 401k contributions depends on the type of self-employed business sponsoring the plan–for example, if the self-employed business is a sole proprietorship, the pretax contributions are reported on line 15 of Schedule 1;
  • Roth solo 401k funds are subject to RMDs;
  • A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
  • Roth IRA funds are not subject to requirement minimum distributions (RMDs);
  • The fair market value (FMV) of assets held in a self-directed IRA is reported on Form 5498;
  • The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
  • At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
  • At termination, the self-directed IRA is only required to file a form 1099-R.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


  1. Posted December 15, 2020 at 6:40 pm | Permalink

    Mark, enjoyed your presentations and appreciate your input. When an independent contractor ( nurse practitioner) years ago , bought several properties and have managed in 401K. Now retiring, have updated plan and been recommended to move to IRA rollover. Would rather continue 401k status, as more control as you mention. Do I need to do anything ( like get property manager credential???, to maintain control. We do not need any funds from these investments for retirement purposes at this time. Thanks very much. Will Donahue

  2. Posted March 20, 2021 at 9:14 pm | Permalink

    I’m self-employed and in the process of opening a Solo 401(k) to use to purchase alternative assets such as real estate. I also want to have the liability protection of an LLC, so is it possible to have a Solo 401(k) LLC? Or, does the Solo 401(k) provide enough liability protection? Also, I’d like the tax free advantage of a Roth, and have been told that the Solo 401(k) already contains the Roth feature. Can you explain that? And finally, I know I have to hold the Roth for 5 years before taking distributions. Since I’m in my mid-60’s I will probably be retiring in about that amount of time so I know I’ll have to convert my Solo 401(k) to a Roth IRA once I no longer have self-employment status. Does the original 5 year holding period transfer over to the Roth IRA, or does a new 5 year period start once the transfer from Solo 401(k) to the Roth IRA is completed?

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