Self Directed 401(k) FAQs

401(k) Frequently Asked Questions

  1. What is a Self-Directed 401(k)?
  2. What is a TRUE Self-Directed 401(k)?
  3. What can I invest in if I have a Self-Directed 401(k)?
  4. What types of retirement accounts can be moved into Self-Directed accounts?
  5. Is this new?
  6. Why haven’t I heard of this before?
  7. Are there downsides?
  8. Why is there so little information available on Self-Directed 401(k) options?
  9. How do I get checkbook control of a Self-Directed 401(k)?
  10. Do I get complete control?
  11. How do I know that this is legal?
  12. Can I transfer funds from a 401K, IRA, Sep IRA, Roth IRA, or 403b and direct investments myself?
  13. Can I invest my Self-Directed 401(k) in Real Estate?
  14. What does the IRS think of investing your Self-Directed 401(k) in Real Estate?
  15. Can my Self-Directed 401(k) purchase Real Estate I already own?
  16. Why does my current broker say I can’t buy Real Estate in my 401(k)?
  17. What is the easiest way to buy Real Estate using my Self-Directed 401(k)?
  18. If I buy an income producing rental property, what happens to the rent income?
  19. I don’t have enough money in my 401(k) to purchase a piece of property outright. Can my Self-Directed 401(k) Plan get a loan and use my 401(k) money as the down payment?
  20. My 401(k) is small. Can I personally co-invest with my Self-Directed 401(k)?
  21. Can my Self-Directed 401(k) co-invest with friends?
  22. Can I be the property manager of the Real Estate?
  23. May I use my Self-Directed 401(k) funds to make improvements or renovations?
  24. Can I buy vacation property?
  25. Can I buy my dream retirement home with my Self-Directed 401(k) and then live in it when I reach the age of retirement?
  26. What are the advantages to using a Self-Directed 401(k) plan when investing my 401(k) in Real Estate?
  27. Can my Self-Directed 401(k) Plan get a mortgage on a piece of property?
  28. Can my Self-Directed 401(k) Plan make loans to other individuals who want to buy Real Estate?
  29. Can I make a loan to my brother so that he can use the money as a down payment on a home?
  30. Can my Self-Directed 401(k) Plan make loans to a friend?
  31. Can my Self-Directed 401(k) Plan make loans to a Real Estate developer?
  32. Can my Self-Directed 401(k) Plan make loans to businesses or companies?
  33. Do taxes and penalties apply when I take money out to buy Real Estate?
  34. Are the gains that my Self-Directed 401(k) Plan makes taxable?
  35. Are there any special taxes that apply when I use leverage?
  36. Does it still make sense to use leverage?
  37. Can I invest outside of my state or outside the country?
  38. What are Prohibited Transactions?
  39. What are Prohibited Investments?
  40. Who is a disqualified person?
  41. How am I a disqualified person? It doesn’t seem to make sense.
  42. What would be classified as Self Dealing?
  43. What are some examples of Prohibited Transactions and / or Self-Dealing Transactions?
  44. What are Exemptions?
  45. Can I buy a business with my Self-Directed 401(k) Plan?
  46. Can I invest in an existing business?
  47. What about S-Corporations?
  48. Can I buy Stocks, CDs, Bonds, Options, etc.?
  49. I have a 401(k) with an old employer. Can I move it into the Self-Directed 401(k) Plan?
  50. I have a 401(k) with my current employer. Can I move it into the Self-Directed 401(k) Plan?
  51. I have several IRAs and old 401(K)s. Can I combine them?
  52. How can I get more information?
  53. How do I get started?

1. What is a Self-Directed 401(k)?

Legally speaking, a self-directed 401(k) is no different than any other 401(k). Having a self-directed 401(k) simply means that you are allowed to direct the investments of the 401(k). Many financial institutions claim that they allow you to self-direct your 401(k) investments but then turn around and restrict what you can invest in. A truly self-directed 401(k) allows you to make the decisions without restriction.
Back to TopGet Started

2. What is a TRUE Self-Directed 401(k)?

It is a step further towards putting you in full control of your 401(k). You don’t have to go to your financial institution to get approval of the investment and get a check written. You truly have a self-directed 401(k) because you have checkbook control.
Back to TopGet Started

3. What can I invest in if I have a Self-Directed 401(k)?

The investments that you make outside your 401(k) can now be made within it. You the investor have tremendous flexibility to make the investments of your dreams. Wouldn’t you love to be able to invest your 401(k) in:

  • Residential Real Estate
  • Commercial Real Estate
  • Raw Land
  • Trust Deeds / Mortgages, and Mortgage Pools
  • Private Notes and Loans
  • Private Stock Offerings
  • Limited Liability Companies (LLCs)
  • Limited Partnerships (LPs)
  • Tax Certificates
  • Receivables
  • Stocks, Bonds, Mutual Funds
  • Annuities
  • Options
  • Currency
  • Futures
  • Commercial Paper
  • And MANY other investments!

Back to TopGet Started

4. What types of retirement accounts can be moved into Self-Directed accounts?
  • Traditional IRAs
  • Sep IRAs
  • Roth IRAs
  • 401(k)s
  • 403(b)s
  • Coverdell Education Savings (ESA)
  • Qualified Annuities
  • Profit Sharing Plans
  • Money Purchase Plans
  • Government Eligible Deferred Compensation Plans
  • Keoghs

Back to TopGet Started

5. Is this new?

No. There are two TRILLION dollars held in retirement accounts; however, only about 3% of retirement accounts are self-directed and only about 2% are invested in Real Estate. But what most people don’t know is that the stock market isn’t your only investment choice for your Self-Directed 401(k). You have been able to invest in Real Estate since the day 401(k)s were created. That was about 30 years ago!
Back to TopGet Started

6. Why haven’t I heard of this before?

Who would tell you? Your stock broker? They will only let you invest your 401(k) in investments that their firm offers. At a bank you will be limited to CDs. At a brokerage firm you will be limited to stocks and bonds. As a consequence, and unfortunately for many investors, it has been a well kept secret that they have other options for their 401(k)s. The traditional investment community has had control of over 97% percent of retirement accounts, and they have been making a great living off your accounts. Why would they want to let you know of alternatives that they wouldn’t benefit from?

As investors have become more disillusioned and frustrated with traditional investment choices, they have begun looking for alternatives. After the steep stock market decline, corporate scandals and corruption (e.g. Enron, ImClone, Worldcom) and many investors seeing their retirement accounts cut in half, they are ready to take control of their own investments. They often want more tangible investments such as Real Estate.

However, when they ask their current custodians / brokers, they are typically told that such investments are illegal, too complicated or that it can’t be done. But those are ignorant and self-serving responses. Although those custodians / brokers may not allow it, it can be done. It is just likely you can’t do it through your current custodian so they financially suffer if you make a move. They aren’t going to tell you about it.
Back to TopGet Started

7. Are there downsides?

The only downside is that some people don’t want to be in charge of their own retirement investments. They are happy having someone else make all the decisions. A self-directed 401(k) is not right for them.

For the rest of us who want to be involved in our retirement investments and make decisions that will affect our retirement, there are no downsides. Just be aware of the prohibited transactions / restrictions (no self-dealing). We firmly believe that you are the best steward for your money. Nobody cares as much about your retirement as you do.
Back to TopGet Started

8. Why is there so little information available on Self-Directed 401(k) options?

The traditional investment community has control and is making money of over 97% of the retirement accounts. Why would they want you to know that you had other options, and risk losing the commissions on your retirement accounts?
Back to TopGet Started

9. How do I get checkbook control of a Self-Directed 401(k)?

Many people and advisors equate a Self-Directed IRA and a Self-Directed 401(k) as being the same. They are not — they have similarities but are quite different. One major difference is: Self-Directed IRAs require a custodian, while Self-Directed 401(k)s DO NOT. The trustee of the Self-Directed 401(k) plan calls all the shots. For example, in the Self-Directed 401(k) plan for John Smith known as the “John Smith 401(k) PSP,” Mr. Smith is the trustee, and he is in complete control of the plan.
Back to TopGet Started

10. Do I get complete control?

Yes, as stated in the answer for #9, the Plan Trustee writes the checks and controls the investments. There isn’t a need for an LLC (as with Self-Directed IRAs) to obtain checkbook control.
Back to TopGet Started

11. How do I know that this is legal?

This is a question that is frequently asked by investors who have never heard that they could invest in anything other than stocks and bonds. They have no idea that they can invest in Real Estate and many other investments. However, Real Estate has been an allowed investment since the day 401(k)s were created.

Find out for yourself by going to the Internal Revenue Service’s website at www.IRS.gov. Request Publication 590. On pages 40-41 you will see what investments are not allowed (see below – collectibles, life insurance, s-corporation stock, etc.). Real Estate is NOT mentioned as a disallowed investment just like stocks, bonds, mutual funds are not mentioned as a disallowed investment.
Back to TopGet Started

12. Can I transfer funds from a 401(K), IRA, Sep IRA, Roth IRA, or 403b and direct investments myself?

Yes. You can self direct all of these types of accounts. They can all be invested into the Self-Directed 401(k) for truly self-directed investing.
Back to TopGet Started

13. Can I invest my Self-Directed 401(k) in Real Estate?

Absolutely. Although less than 3% of retirement accounts are invested in non-traditional investments (anything other than Dow & Nasdaq stocks, bonds, CDs, etc), and less than 2% are invested in Real Estate, that is changing. More and more individuals are becoming more and more frustrated with the options offered by their current custodians. Individuals are exploring investments that they can see and touch and that have some tangible value such as Real Estate. They have seen the outstanding returns that investors have historically received in Real Estate and want to move all or part of their retirement money into various Real Estate investments.

Within the broad category or Real Estate there are many options for investment:

  • Residential Rentals
  • Commercial Properties
  • Condominiums
  • Mobile Homes
  • Raw Land
  • Real Estate in Foreign Countries
  • Trust Deeds / Mortgages, and Mortgage Pools

Back to TopGet Started

14. What does the IRS think of investing your Self-Directed 401(k) in Real Estate?

The IRS rules do not prohibit Self-Directed 401(k)s from investing in real estate.
Back to TopGet Started

15. Can my Self-Directed 401(k) purchase Real Estate I already own?

No. This would be considered a prohibited transaction (see IRC 4975). You many not purchase property which is currently owned by you or any other disqualified person (see below). You would need to find another piece of Real Estate that you don’t already own to purchase.
Back to TopGet Started

16. Why does my current broker say I can’t buy Real Estate in my 401(k)?

Likely because your current broker won’t let you invest in real estate through their custodian. Just because that isn’t something they offer doesn’t mean that you can’t do it; It just means that you can’t do it through them. It is a limitation that your broker is placing on your 401(k) NOT one that the IRS is placing on your 401(k). Or your current broker may just be ignorant. Either way, you can invest in Real Estate.
Back to TopGet Started

17. What is the easiest way to buy Real Estate using my Self-Directed 401(k)?

A truly Self-Directed 401(k) plan easily allows you invest in real estate. Because your plan has a checking account, you simply write a check to the title company, etc., and title the real estate in the name of the plan.
Back to TopGet Started

18. If I buy an income producing rental property, what happens to the rent income?

The income goes back into the Self-Directed 401(k) plan, and you retain the tax deferred or tax free status of the investment.
Back to TopGet Started

19. I don’t have enough money in my 401(k) to purchase a piece of property outright. Can my Self-Directed 401(k) plan get a loan and use my 401(k) money as the down payment?

Yes you can use your 401(k) money as the down payment and then have your Self-Directed 401(k) plan get a loan for the balance. However, you will not be able to personally guarantee the loan. It must be a non-recourse type of loan which means that if your 401(k) fails to make payments, the only recourse the lender has is against the property itself. Further, there will be tax ramifications to doing so; UDFI (unrelated debt financed income) tax applies when a loan is obtained so you would want to confer with your tax professional about what forms would be necessary.
Back to TopGet Started

20. My 401(k) is small. Can I personally co-invest with my Self-Directed 401(k)?

It is not a prohibited transaction for you to co-invest with your Self-Directed 401(k). However, there are certain formalities that need to be adhered to, and there are some situations where it isn’t advised.
Back to TopGet Started

21. Can my Self-Directed 401(k) co-invest with friends?

Yes. Self-Directed 401(k)s may purchase an undivided (and proportionate) interest in Real Estate.
Back to TopGet Started

22. Can I be the property manager of the Real Estate?

That depends. With just a Self-Directed IRA the answer is no. But with the Self-Directed 401(k) plan you have the ability to manage the property, collect the rent and pay the bills. Unlike just having a self-directed IRA which put restrictions on what you can do, the Self-Directed 401(k) plan structure allows you to perform maintenance on the property, advertise for renters, collect and deposit the rent checks, pay the real estate bills, etc. This saves your Self-Directed 401(k) a lot of money and helps provide a more comfortable and prosperous retirement for you.
Back to TopGet Started

23. May I use my Self-Directed 401(k) funds to make improvements or renovations?

Yes. In fact, you must use Self-Directed 401(k) funds to make the improvements and pay all expenses associated with the property. All expenses of the property are paid with Self-Directed 401(k) funds, and all profits made on the property are returned to the Self-Directed 401(k). This makes sense because it is an investment of the Self-Directed 401(k).
Back to TopGet Started

24. Can I buy vacation property?

Yes. Doing so would not constitute a prohibited transaction. However, you cannot vacation there.
Back to TopGet Started

25. Can I buy my dream retirement home with my Self-Directed 401(k) and then live in it when I reach the age of retirement?

Yes. Your Self-Directed 401(k) would be the original owner. You would use your Self-Directed 401(k) money to make the purchase and maintain the property. Any rents generated would be returned to the Self-Directed 401(k). However, upon reaching retirement age, the property could be distributed out to you. Of course, you would have to pay taxes at that point but without penalty.
Back to TopGet Started

26. What are the advantages to using a Self Directed 401(k) plan when investing my 401(k) in Real Estate?

Real estate deals can be time sensitive. With a true Self-Directed 401(k), you can act immediately to secure the down payment, etc. If you see something you like, write the check.
Back to TopGet Started

27. Can my Self-Directed 401(k) Plan get a mortgage on a piece of property?

Yes. The mortgage would need to be a non-recourse type of loan, meaning that if your Self-Directed 401(k) fails to make the payments, the only recourse the lending institution has is the property itself. Also, be aware that if your Self-Directed 401(k) obtains a loan, unrelated debt financing income tax will apply.
Back to TopGet Started

28. Can my Self-Directed 401(k) Plan make loans to other individuals who want to buy Real Estate?

Absolutely. And this is done frequently, and it is a great investment for your Self-Directed 401(k) because the loan can be secured by the property.
Back to TopGet Started

29. Can I make a loan to my brother so that he can use the money as a down payment on a home?

Yes. According to IRC 4975, siblings are not included in the definition of disqualified persons. Thus, a loan to your brother would not be a prohibited transaction. Although some suggest that it was an error on the part of the IRS to omit siblings from the definition, they, nonetheless, were omitted and to the best of our knowledge, there has never been an IRS ruling to the contrary.
Back to TopGet Started

30. Can my Self-Directed 401(k) Plan make loans to a friend?

Absolutely. Friends are not disqualified persons under the Code, and therefore, your Self-Directed 401(k) can make a loan to them for any purpose whatsoever (boat, airplane, hot tub, home improvements, etc.). Of course, you want to make sure that there are proper formalities and reasonable terms to the loan.
Back to TopGet Started

31. Can my Self-Directed 401(k) Plan make loans to a Real Estate developer?

Yes. Your Self-Directed 401(k) can loan money to a Real Estate developer to finance the purchase of property or the development of property. Developers often look for private financing so it is a great way to get your Self-Directed 401(k) involved in Real Estate development. And because developers often pay an above market interest rate, the loan can be a great investment for your Self-Directed 401(k).
Back to TopGet Started

32. Can my Self-Directed 401(k) Plan make loans to businesses or companies?

Sure. Your Self-Directed 401(k) can make a loan to any type of business. However, be aware that there are some restrictions on loan money to any business that you or any other disqualified person has an ownership interest in.
Back to TopGet Started

33. Do taxes and penalties apply when I take money out to buy Real Estate?

No. You DO NOT take money out to purchase Real Estate or anything else you want to buy. It is just a purchase of your Self-Directed 401(k). There are no taxes or penalties. Instead of buying 1000 shares of Microsoft or any other typical stock, your Self-Directed 401(k) is just making a different type of investment. The method of doing so is different but the tax ramifications are the same.
Back to TopGet Started

34. Are the gains that my Self-Directed 401(k) Plan makes taxable?

Not in most cases. If a Self-Directed 401(k) buys a piece of property and then sells it at a profit, the gains stay within the Self-Directed 401(k). If you have a traditional 401(k), the gains are tax-deferred. If you have a Roth 401(k), the gains are tax free. Note, you alter that result if you use leverage.
Back to TopGet Started

35. Are there any special taxes that apply when I use leverage?

Unrelated debt financing for real estate purchases DOES NOT apply. It does with a self-directed IRA, so this is a huge advantage.
Back to TopGet Started

36. Does it still make sense to use leverage?

Absolutely, because of your increased buying power when you use leverage.
Back to TopGet Started

37. Can I invest outside of my state or outside the country?

Yes! Your Self-Directed 401(k) can invest outside of the U.S. States. There are many great investment opportunities in other countries.
Back to TopGet Started

38. What are Prohibited Transactions?

Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your Self-Directed 401(k). The IRS defines a prohibited transaction as follows:

“Generally a prohibited transaction is any improper use of your 401(k) account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant).” IRS Publication 590

IRC 4975 is the section that lays out the rules on prohibited transactions. Prohibited transactions generally involve one of the following: (1) doing business with a disqualified person; (2) benefiting someone other than the 401(k); (3) loaning money to a disqualified person; or (4) investing in a prohibited investment.

In plain English, prohibited transactions are those transactions that violate the basic intent of the 401(k). Your Self-Directed 401(k) must benefit rather than benefiting you personally. In other words, there can be no “self dealing” transactions. However, there are many ways in which you can invest your Self-Directed 401(k) and not be in violation of the prohibited transaction law. And when your Self-Directed 401(k) benefits, you benefit because it is for your retirement.
Back to TopGet Started

39. What are Prohibited Investments?

The Internal Revenue Code does not specifically authorize investments within a 401(k); rather, the code outlines what types of investments are not allowed. The Prohibited Investments include:

  • Artwork
  • Rugs
  • Antiques
  • Metals
  • Gems
  • Stamps
  • Collectible Coins
  • Beverages
  • Stock in a S-Corporation
  • And certain other tangible personal property

Back to TopGet Started

40. Who is a disqualified person?
  • the 401(k) holder and his or her spouse;
  • the 401(k) holder’s ancestors, lineal descendants and their spouses;
  • investment advisors and managers
  • any corporation, partnership, trust or estate in which the 401(k) holder has a 50% or greater interest; and
  • anyone providing services to the 401(k) such as a trustee or custodian.

Back to TopGet Started

41. How am I a disqualified person? It doesn’t seem to make sense.

There is a clear distinction between your 401(k) and you individually. You and your 401(k) are not the same. Your 401(k) is a separate Trust for your benefit when you retire.
Back to TopGet Started

42. What would be classified as Self Dealing?

Self dealing is using your Self-Directed 401(k) in transactions that in some way benefit you (or other disqualified persons) individually. The purpose of your 401(k) is to provide for your retirement. It is not intended to benefit you prior to retirement and distribution of the funds.
Back to TopGet Started

43. What are some types and examples of Prohibited Transactions and / or Self-Dealing Transactions?
  • Self dealing with a family member (having your Self-Directed 401(k) purchase a home from your father).
  • Self dealing with yourself (having your Self-Directed 401(k) purchase a home from yourself).
  • Personal use of Self-Directed 401(k) property (buying a rental vacation home with Self-Directed 401(k) money and then staying in the home when on vacation).
  • Receiving personal benefit from your Self-Directed 401(k) (paying yourself for work that you do on the property such as repairing the roof).

Back to TopGet Started

44. What are Exemptions?

Exemptions are permission to invest in something or in some way that is technically a prohibited transaction. For example, it is a prohibited transaction to rent property owned by your Self-Directed 401(k) to your child. An exemption would allow you to do so.
Back to TopGet Started

45. Can I buy a business with my Self-Directed 401(k) Plan?

Yes you can buy a business with your Self-Directed 401(k) money. Please contact us for details.
Back to TopGet Started

46. Can I invest in an existing business?

Yes. This can be done as the purchase of stock as a loan to the business.
Back to TopGet Started

47. What about S-Corporations?

S-Corporations do not allow Self-Directed 401(k)s as investors; they only allow individuals as investors. Therefore, it isn’t so much that 401(k)s are prohibited from investing in S-Corporations rather that S-Corporations don’t permit having a 401(k) as a shareholder. It is likely that the investment of the 401(k) would revoke the sub-s status of the corporation.
Back to TopGet Started

48. Can I buy Stocks, CDs, Bonds, Options, etc.?

Yes. You can invest in any 401(k) permitted investment. That includes publicly traded stocks, CDs, mutual funds, annuities, bonds, stock options, futures, etc. In fact, if you are an active swing trader or day trader, you will be able to trade your Self-Directed 401(k) in a manner that your current broker does not allow you to trade using the Self-Directed 401(k) Plan. For example, you probably have asked your broker if you can buy or sell Options (Calls and Puts). Or maybe you would like to write Covered Calls or do Spreads and have been told no. The Self-Directed 401(k) Plan allows you to trade your way.
Back to TopGet Started

49. I have a 401(k) with an old employer. Can I move it into the Self-Directed 401(k) Plan?

Yes. You can move these 401(k) funds into the Self-Directed 401(k) Plan. You can start controlling this money yourself rather than letting your old employer control your future.
Back to TopGet Started

50. I have a 401(k) with my current employer. Can I move it into the Self-Directed 401(k) Plan?

The 401(k) plan documents will specify what you can do but most of the time you cannot move money from a 401(k) plan if you are currently working for the company. Ask your company plan administrator if “in service transfers” are allowed. If the answer is “yes,” then you can transfer to your Self-Directed 401(k).
Back to TopGet Started

51. I have several IRAs and old 401(k)s. Can I combine them?

Yes. They can all be combined and then invested into your Self Directed Retirement Plans LLC so that your buying power is maximized. The only restriction is on 401(k)s; at is is that you generally must no longer work for the employer. You can usually combine multiple retirement accounts into one account. Or in the event that they can’t be combined, such as the case of a traditional IRA and a Roth IRA, they can still be invested into the same Self Directed Retirement Plans LLC so that you still have maximum buying power.
Back to TopGet Started

52. How can I get more information?

Email rick@sdretirementplans.com.
Back to TopGet Started

53. How do I get started?

Email rick@sdretirementplans.com. We will get you on the path to optimizing your IRA or 401(k).
Back to TopGet Started