What Are the Self-Directed 401k Eligibility Requirements?

We’ve already discussed the benefits of a self-directed 401(k) plan. Now you may be wondering if you’re eligible for this plan and all its benefits. In this post, I’ll discuss self-directed 401(k) eligibility requirements and give some examples. Eligibility requirements for self-employed individuals are a bit complex, so read on for a quick summary.

Employer Sponsored Self-Directed 401(k) Plans

More companies are offering the self-directed 401(k) plan. Some employers will refer to it as a "brokerage window." This signals that you have a window to make your own investments, outside of your employer’s investment offerings. However, don’t expect HR to announce all your 401(k) options. I frequently hear of employees who aren’t aware of this “brokerage window” until they search through their benefits handbook. I’d suggest directly asking your HR representative if they offer a self-directed 401(k) or if they’d consider extending this option to you.

What Happens if I Leave My Company?

If you no longer work for your employer and want to move your standard 401(k) into a self-directed 401(k) you have two options:

Direct Rollover

Funds in the current retirement plan are immediately transferred to the new self-directed 401(k). This transaction doesn’t go through a custodian and no withholding taxes are taken.

Traditional Rollover

Funds in the current retirement plan are transferred to a custodian. The custodian has up to 60 days to transfer those funds into the self-directed 401(k). If the transfer isn’t made within that time frame, the funds will be considered dispersed. This can lead to penalties or taxes.

Self-Employed 401(k) Eligibility Requirements

Even if you have an existing traditional 401(k) plan with your employer, you can still set-up your own personal self-directed 401(k) plan. However, you’d have to meet self-employed business owner requirements to start this second plan. There are two main requirements for a self-employed 401(k) also known as a solo 401(k).

Self-Employment Requirements

To qualify for a solo 401(k) you must own and operate one of the following:

  • Sole Proprietorship
  • Limited Liability Company (LLC)
  • C Corporation
  • S Corporation
  • Limited Partnership

Typically business owners keep their day job while they get their business going. If this is the case, you don’t have to wait until you transition into full-time self-employment. Part-time self-employment also qualifies for the self-directed 401(k) plan.

No Full-Time Employees

Full-time employees are defined as employees who work more than 1,000 hours a year. A spouse who works over the 1,000 hours is excluded. Thus, the typical part-time employees you would employ in your own small business are fair game.

Start a Self-Directed 401(k) Today

As you can see, the eligibility requirements for a self-directed 401(k) can be very specific. You must own and run a sole proprietorship or other qualified operation. Plus, you can’t have full-time employees, with the exception of a spouse. Once you meet these requirements, starting or transferring a plan to a self-directed 401(k) can open up a new world of high-yield investment options. We can help setup your self-directed 401(k). Call us at (425) 449-4554 for a consultation.

Last Updated: 
April 15, 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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