Self-Directed IRA and Solo 401(k): Retirement Accounts for the Self-Employed

Self-Directed IRA: What You Can and Cannot Invest In

A self-directed IRA uses a specialized custodian (not Vanguard or Fidelity) that allows alternative investments. The contribution limits are the same as traditional and Roth IRAs: $7,000 in 2024 ($8,000 if age 50+). You can choose between traditional (pre-tax contributions, taxed on withdrawal) and Roth (after-tax contributions, tax-free withdrawal) structures.

What you CAN invest in: Real estate (rental properties, raw land, commercial), private company stock (angel investing, private placements), private lending (mortgages, notes), cryptocurrency (with custodians that support it), tax liens and deeds, precious metals (IRS-approved gold and silver coins and bars), and limited partnerships.

What you CANNOT invest in: Collectibles (art, antiques, gems, stamps, wine, coins that are not IRS-approved), life insurance contracts, and S-corporation stock if you own more than 50% of the S-corp. The prohibited transaction rules are strict and violations can result in the entire IRA being deemed distributed and taxed.

Prohibited Transactions and the Self-Dealing Rules

The most important thing to understand about self-directed IRAs is what you cannot do with the assets inside them. The IRS prohibits any transaction that benefits you, your beneficiaries, or any "disqualified person" before retirement. Disqualified persons include you, your spouse, your parents and children, any business you own more than 50% of, and certain service providers.

Examples of prohibited transactions: Using an IRA-owned rental property as a vacation home for yourself. Hiring your own company to manage an IRA-owned property. Buying property from your IRA using personal funds. Lending money from your IRA to yourself or a family member. Having your IRA invest in a business where you are actively involved in day-to-day operations.

The consequences of prohibited transactions are severe: the entire IRA is treated as distributed to you, meaning the full value becomes taxable as ordinary income (plus a 10% early withdrawal penalty if under 59.5). Always consult a tax professional experienced with SDIRAs before making any transaction. Learn more about retirement tax strategies →

Solo 401(k): Higher Contribution Limits for the Self-Employed

The Solo 401(k), also called an Individual 401(k), is designed for self-employed individuals with no full-time employees other than a spouse. It combines the high contribution limits of a 401(k) with the flexibility of self-directed investing. You can set one up at major brokerages (Vanguard, Fidelity, Schwab) or at dedicated SDIRA providers (IRA Financial, Rocket Dollar, Alto).

For 2024, total contributions can reach up to $69,000 ($76,500 if age 50+). This breaks down into two components: an employee deferral of up to $23,000 ($30,500 with catch-up) as either pre-tax or Roth, and a profit-sharing contribution of up to 25% of your net self-employment income. The profit-sharing is always pre-tax (employer contribution) and is capped at the lesser of 25% of compensation or $46,000 (minus any catch-up used in the deferral portion).

Unlike a SEP IRA, the Solo 401(k) allows Roth contributions and loans. You can borrow up to 50% of your vested balance (capped at $50,000) from your Solo 401(k), which can be useful for entrepreneurs needing short-term capital. The loan must be repaid with interest over 5 years.

UBIT: When Your SDIRA Owns a Business or Uses Debt

UBIT (Unrelated Business Income Tax) applies when your SDIRA generates income from a trade or business that is unrelated to the IRA's tax-exempt purpose, or when the IRA uses debt financing. The most common scenario is using a non-recourse loan to buy real estate inside a self-directed IRA.

If your IRA buys a $200,000 rental property with $100,000 cash from the IRA and a $100,000 non-recourse loan, the portion of rental income attributable to the borrowed money (roughly 50%) is subject to UBIT at trust tax rates. Trusts reach the highest tax bracket (37%) at just $14,450 of income. This can significantly reduce returns on leveraged IRA real estate investments.

To avoid UBIT, you can: buy real estate with 100% IRA cash (no debt), invest through a Real Estate Investment Trust (REIT), or keep leveraged investments in a taxable account instead. Some investors use a Solo 401(k) to purchase real estate through a wholly-owned LLC, which provides more flexibility around UBIT rules. Real estate investing strategies →

Can I use a self-directed IRA to buy real estate?

Yes, real estate is one of the most popular investments in self-directed IRAs. You can buy rental properties, raw land, commercial real estate, and even tax liens. The key rule: every expense (property taxes, insurance, repairs, management) must be paid from the IRA, and every dollar of income (rent, sale proceeds) must go back into the IRA. You cannot personally benefit from the property until retirement. Using debt to buy real estate in an IRA triggers UBIT on the leveraged portion, so many investors buy with IRA cash only.

What is UBIT and how does it apply to SDIRAs?

UBIT (Unrelated Business Income Tax) is a tax on income generated by an IRA from a trade or business unrelated to its tax-exempt purpose, or from debt-financed investments. For real estate bought with a non-recourse loan, the rental income attributable to the borrowed portion is taxed at trust rates (starting at 10% and reaching 37% quickly). Many SDIRA investors buy real estate with all cash to avoid UBIT entirely. Consult a tax professional for your specific situation.

What is the difference between a Solo 401(k) and a SEP IRA?

The Solo 401(k) allows higher total contributions than a SEP IRA in most cases. For 2024, a Solo 401(k) allows up to $69,000 ($23,000 employee deferral + up to 25% profit-sharing). A SEP IRA allows up to the lesser of 25% of compensation or $69,000 — but only the employer contributes, so you cannot make employee deferrals. The Solo 401(k) also allows Roth contributions and loans; the SEP IRA does not. For most self-employed individuals earning over roughly $50,000, the Solo 401(k) is the better choice.

Can I have both a Solo 401(k) and a regular 401(k) from a W-2 job?

Yes, you can have both, but the total employee deferral limit applies across all accounts. For 2024, the combined employee deferral from all sources cannot exceed $23,000 ($30,500 with catch-up). If you contribute $23,000 through your W-2 job's 401(k), you cannot also make employee deferrals to your Solo 401(k). However, you can still make profit-sharing contributions to your Solo 401(k) (up to 25% of self-employment income) because those are employer contributions, which are subject to a separate limit. This is a common strategy for high earners with both W-2 and self-employment income.

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