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Self Directed 401k Rules

A Self-directed 401(k) is as good as a 401(k) plan or an IRA except that it provides you a host of investment avenues to invest your money in. Like a self directed IRA, you may invest your money in stocks, bonds, mutual funds and CDs, real estate, notes, private placements, tax lien certificates and much more. A company sponsored self directed 401(k) offers employees more opportunities to generate greater returns on their investment because they have more asset classes to choose from.

Qualifications for the Self Directed 401(K) presentation by Rick Pendykoski

Rules Governing Eligibility

A 401(k) a plan would exclude those employees who are not yet 21 years in age.

Rules Governing Contribution Limits

There is a limit on the contributions that you can make tax free to your traditional or safe harbor 401(k) plan. The limit is $22,500 for 2023 and was $20,500 for 2022. For a simple 401(k) plan your contribution limit is $15,500 in 2023.

A 401(k) plan may allow participants who are age 50 or over to make additional contributions. These additional contributions or catch-up contributions are not subject to the general limits that apply to 401(k) plans. For a traditional or safe harbor 401(k) plan you can make catch up contributions up to $7,500 for 2023. While if you participate in a SIMPLE plan and you are age 50 or older, the tax deferred catch up contributions cannot exceed $3,500 for 2023.

The catch-up contribution for a year cannot exceed the lesser of the following amounts:

  • The catch-up contribution limit, above, or
  • The excess of your compensation over the elective deferrals that are not catch-up contributions.

Rules Governing Distributions

If you have invested in a self directed 401(k), distributions of tax deferred contributions cannot be made until one of the following occurs:

  • You die, become disabled, in-service transfers are allowed, or otherwise have a severance from employment.
  • The plan terminates and no successor defined contribution plan is established or maintained by the employer.
  • You reach age 59½ or incur a financial hardship

Distributions from a self directed 401(k) plan are taxable unless the amounts are rolled. If there is no immediate or heavy financial need (medical care, purchase of principal residence, payment of tuition fees, funeral expense) distribution will be made on April l of the first year after the later of the following years:

  • Calendar year in which you reach age 70½.
  • Calendar year in which you retire.

However, a plan may require you to begin receiving distributions by April 1 of the year after you reach age 70½, even if you have not retired.

The distributions from a self directed 401k plan can be taken as either a lump sum amount or as an annuity.

What types of transactions are prohibited?

The investment types prohibited for a solo 401(k) are clearly defined. This essentially includes getting into a transaction with disqualified persons. Two examples would be the plan participant purchases a condo and allows his son to live there, or purchases a part of the father owned business. This also involves direct or indirect money lending like the plan subscriber loans money to his spouse or offspring, or father puts his signature on a loan guarantee pertaining to solo 401(k) plan. Transactions that allow the plan participant to be eligible for any direct or indirect benefit drawn from the plan are also forbidden. This involves purchasing a property by the participant, and then charge a management fee or makes a commission on the sale. Or fixing a property on his own rather than paying a non disqualified person to do the work. A solo 401(k) can make investments in C Corp shares but is prohibited from buying shares through the rules of an S Corp.

Can real estate be bought using self directed 401(k)?

Yes. When a new 401(k) plan is established, assistance is extended to clients regarding transfer or rolling over of qualified funds into the new plan. The new plan possesses a checking account. In the event of an R E opportunity arising, the plan participant is expected to write a check following which the title company titles the property in favor of 401(k). The client is required to write a check for all kinds of ancillary fees and setup expenses. For long term purchase plans, the tenant will have to direct his rent exclusively to 401(k) plan only.