A self-directed 401(k) is a retirement account that can offer more asset choices than its traditional counterpart. It differs from a standard 401(k) plan, which only lets you invest in a preset selection of options like mutual funds, target-date funds, and index funds.

But a self-directed plan’s added freedom comes with more responsibility and risk potential. Investors would need to manage their funds as if they’re handling a brokerage account, which could potentially lead to costly mistakes. 

In this article, we’ll explain how a self-directed retirement account works so you can decide whether it’s the right move for your retirement savings plan.

What’s a self-directed 401(k)?

Self-directed 401(k)s may offer access to more investments than traditional plans. The term “self-directed” refers to the investment vehicles available — it’s not technically a separate type of 401(k).

These accounts can open the door to investments you typically wouldn’t see offered in a traditional 401(k), such as:

• Real estate
• Precious metals (like gold and silver)
• Private equity or startups
• Tax liens and deeds
• Cryptocurrency (with some custodians)
• Promissory notes

According to the IRS, self-directed 401(k)s play by the same rules as traditional 401(k)s. This means you need to follow specific reporting and withdrawal requirements — otherwise, you may be subject to penalties and fees.

What’s a self-employed 401(k)?

A self-employed 401(k) — also called a solo 401(k) or private 401(k) — is a retirement savings plan designed for individuals. Self-employed people and small business owners without full-time employees (other than a spouse) can open these accounts.

As both employer and employee, you can contribute in two ways:

• Employee contributions: Up to the annual limit set by the IRS (e.g., $23,500 in 2025, or $31,000 if you’re making catch-up contributions)
• Employer contributions: Up to 25% of compensation as defined by the plan, or part of your earned income as a self-employed individual

Most solo 401(k)s are self-directed, but not all self-directed accounts are solo 401(k)s. And although regular employers are allowed to offer self-directed options, many choose not to.

Who can open a self-directed solo 401(k)?

Self-directed Solo 401(k)s are most common among:

• Freelancers and independent contractors
• Small business owners with no full-time employees (other than a spouse)
• Solo entrepreneurs or gig workers
• Sole proprietor LLCs, partnerships, and S-corporations 

If you want to open a 401(k) on your own, you don’t need a formal corporation. You just need to earn income from self-employment. That means even part-time freelancers or consultants may qualify.

Pros and cons of self-directed 401(k)s

Before deciding whether a self-directed 401(k) is the right investment option for you, consider the following advantages and disadvantages.

Pros

• Greater control over investments: Self-directed 401(k)s give you complete authority to decide where and how you want to invest your retirement savings. You’re not limited to a list of funds a plan administrator picks. 
• Broader asset choices: With a self-directed account, you can invest in individual stocks, alternative assets, such as real estate, private equity (think startups and other private companies), and precious metals, giving you access to more advanced and complicated investment options.
• Potential for higher returns: Because self-directed options can offer higher-risk, higher-reward opportunities, they could have better growth potential for experienced investors who do their research. 
• Regular 401(k) rules: Many self-directed 401(k) options and regulations are the same as standard accounts. For instance, you can choose between Roth and traditional options,  Your contributions and growth will be taxed accordingly. 

Cons

• Higher risk and complexity: Investing in alternative assets can involve greater volatility and more complex decision-making. You could have a higher risk of losing your funds than with traditional portfolios. Note that not all the investment options are alternative assets. Some may choose this route to be able to invest in stocks or mutual funds not available to them on the pre-set list in the traditional 401(k). 
• Greater responsibility for due diligence: You’re responsible for vetting investment opportunities and ensuring they’re allowed within your plan. Mistakes can lead to IRS penalties. 
• Potentially higher fees: Some custodians charge extra for specialized investments or account maintenance, particularly if real estate or private deals are involved. 
• Time-intensive management: This may require you more actively select, manage, and monitor your investments. This may not be ideal for those with less investing experience. 

Self-directed 401(k) rules and restrictions

The IRS treats self-directed 401(k)s like regular tax-deferred retirement plans, but there are a few additional rules to consider:

• No personal-use assets: You can’t invest in property you or your family live in, vacation at, or plan to use personally.
• No collectibles: Items like artwork, antiques, and wine are off-limits.
• Disqualified persons: You can’t conduct transactions (like sales, leases, and payments) with disqualified people. Among many, these individuals include spouses, descendants, and any business you or they own. 
• No self-dealing: You can’t benefit directly from an investment before retirement. For example, you can’t rent your 401(k)-owned property to a family member or buy a property from yourself.

Violating these rules can trigger penalties or cause the IRS to disqualify your account, resulting in a tax bill on the full balance.

Is a self-directed 401(k) right for you?

If you want to go beyond index funds and take a more active role in shaping your retirement portfolio, a self-directed 401(k) might be a powerful tool. But it may not be ideal for everyone.

These plans can require in-depth financial knowledge and a more hands-on approach. If you’re not confident in selecting your own investments — or don’t have the time — they may not be the best fit. 

These plans often will allow you to purchase a specific stock or mutual fund that isn’t offered through your employer’s traditional plan. These don’t always have to be alternative investments or higher risk – it can just provide you with more options than are currently available. Be sure you investigate any fees associated with these, as they typically have a higher annual cost than the traditional plan. 

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‍This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.