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