Setting up a Self-Directed 401k

Setting up a self-directed 401(k) may seem like an intimidating process. We’ve worked with many clients who are convinced of the self-directed 401(k)’s benefits, but aren’t quite sure where to get started. These four steps can help you get started. Today, we’ll cover the basics of setting up a self-directed 401(k) and throw in some tips on streamlining the administrative process.

Understanding Self-Directed 401(k) Eligibility Requirements

In most cases, we see individuals qualify for a self-directed 401(k) by meeting self-employment requirements. We’ve broken down these requirements into three parts:

Part 1: Perform Self-Employment Work<

This can be part-time work at the minimum or even moonlighting work done in conjunction with a full-time job. In fact, you can have a separate retirement plan with your full-time employer and also open a self-directed 401(k) under your self-employment work. Having two separate retirement plans or completing a plan rollover can be an overwhelming task. We can help you go over your options and set up a plan that fits your retirement needs.

Part 2: Operate a Qualifying Self-Employment Business

Here are the qualifying business types:

  • A Trade or Business. This can be as common as a flower delivery business or as innovative as your own AI software company. The main requirement is that your business must have intent of profit. This intent must show itself through some kind of regular activity to prove that you’re trying to further your business.
  • A Sole Proprietor or Independent Contractor. Examples include freelance writers, web designers, ride-hailing service drivers or private tutors. If you make an income from providing such personal services, then you qualify as a sole proprietor or independent contractor.
  • A Partnership or Husband-and-Wife Sole Proprietorship. In this case, the self-directed 401(k) plan would be registered under the partnership, not under each individual. Also, each individual in the partnership must perform self-employment activity and have an earned income from that activity.
  • An S-Corp or C-Corp. In this case, your business has been incorporated and you’ve filed all the proper paperwork to be considered a separate legal entity.
  • A Limited Liability Company. This is for those of you who have combined the benefits of partnerships and corporations.

Part 3: Don’t Employ Any Full-Time Employees

A full-time employee works over 1,000 hours per year. However, a spouse who works over the 1,000 hours is excluded.

Meet Solo 401(k) Enrollment Deadlines

If you’re already considering a solo 401(k), plan ahead. The enrollment deadline is December 31. You’ll want to become familiar with the solo 401(k) adoption agreement document beforehand. Remember you’ll have to not only execute this establishing document, but also set up a checking account for your solo 401(k) investments.

Understand Investment Responsibilities

Unlike the traditional mutual funds found in employer sponsored 401(k) plans, a self-directed 401(k) plan requires more active investing. If you choose to invest in stocks, be prepared to babysit them.

Set-up a Self-Directed 401(k) with Checkbook Control

As you can see, setting up a self-directed 401(k) requires a few important steps. While we can’t research, pick and monitor your investments, we can streamline the process. We can set up a self-directed 401(k) plan and establish checkbook control on our secure platform. We specialize in private, high yield investments. Reach out today for your consultation. 

Last Updated: 
April 22, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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