How the SECURE Act Impacts Self-Directed Solo 401(k)s
The 2019 year-end domestic appropriations bill included the Setting Every Community Up for retirement Enhancement Act (SECURE ACT). The SECURE act contains several substantive changes to IRA and 401(k) based retirement plans.
While the law makes changes in a range of areas related to 401(k) plans, we wanted to outline the specific changes that may affect holders of a self-directed Solo 401(k).
Required Distributions Now Start at Age 72
The age at which one is required to start taking distributions from a 401(k) has been pushed back from 70½, to 72.
Individuals who would prefer to not take distributions will see this change as an incremental benefit. It’s also simpler to prepare for and manage distributions with a clean start-date of age 72. The 70 ½ age marker could be somewhat confusing.
The first distribution can be taken by the end of the year when the taxpayer turns 72, or delayed until April 1st of the following year. This means that someone turning 72 in 2022 can delay taking their first distribution until April 1, 2023.
The first distribution will be taken using the age 72 life expectancy factor.
When one chooses to delay the first RMD, there will be two distributions required in the first year. The normal 73rd year distribution will also need to be taken.
This change takes effect after December 31, 2019 and affects people who turn 70 ½ after that date. Those born before June 1, 1949 will be subject to the old rules.
New 10-Year Distribution Rule for Inherited Plans
The biggest change in the new law surrounds requirements for distributions from non-spousal inherited retirement plans.
Before the SECURE Act, a non-spousal inheritor of a plan could choose to take a full distribution of the account within a 5-year period or stretch distributions over their lifetime.
The capacity to stretch plan distributions over a longer term has been eliminated and replaced by a new 10-year rule. The entire inherited account must be distributed by the end of the 10th year from inheritance. A tax penalty of 50% the amount that should have been distributed applies if the account is not fully distributed by this time.
This rule applies to any account inherited after December 31, 2019, and will not impact existing non-spousal inherited plans.
The following “Eligible Designated Beneficiaries” are exempted from this requirement:
• Spouse
• Disabled beneficiaries (as defined in IRC Section 72(m)(7))
• Chronically Ill beneficiaries (as defined in IRC Section 7702B(c)(2))
• Individuals not more than 10 years younger than the decedent
• Certain minor children of the original account owner, but only until they reach the age of majority
For these Eligible Designated Beneficiaries, the old rules that allow for the use of a life expectancy based required minimum distribution apply.
Solo 401(k) Establishment Deadline
Self-employed individuals considering establishing a Solo 401(k) now have an extension of the time frame to do so.
Prior to the SECURE Act, a 401(k) had to be implemented by December 31 of the tax year to be able to accept contributions for the year.
You can now establish a plan up until the tax filing date of the business, including extensions, and will be able to treat the plan as if it has been established on the last day of the prior year. Your new plan can now accept contributions for the prior tax year.
This time extension only applies to plans funded via employer contributions, such as the profit-sharing component of the Solo 401(k). Employee contributions via salary deferral won’t be able to be made for the prior tax year in this situation.
Long-Term Part-Time Employees
This change could potentially impact Solo 401(k) qualification, including for existing plan sponsors.
The eligibility rules for 401(k) qualification now include any employee who works a minimum of 500 hours in 3 consecutive years.
The prior eligibility requirement was 1,000 hours of service in one year. This change applies to plans implemented after December 31, 2020, with 2021 being the first tax year that would count as a year of service if 500 hours were worked.
The first year that a plan would need to provide benefits to a long-term part-time employee is 2024.
Solo 401(k) plan sponsors who currently do not have any qualifying 1,000 hour per year employees but do have part-time workers under that threshold, an evaluation of plan suitability going forward will be in order.
$5,000 Early Distribution for Birth or Adoption
A new rule allows for a small early distribution from a retirement plan without a 10% penalty in the case of a new child.
A distribution of up to $5,000 may be taken penalty free within one year from childbirth or adoption of a child under the age of 18, any normal taxable amount would still be owed.
If both parents have a retirement plan, they can each distribute up to the $5,000 amount. A distribution may be taken for each child born or adopted and is not a one-time exception like a first-time home purchase.
In the future, the distributed amount can even be added back to the plan above and beyond any allowable contribution limit for a given year.
Increased Penalties for Failure to File
The fees for failure to file form 5500-EZ have been increased significantly, and could accrue at a rate of $250/day to a maximum of $150,000. As such, it’s critically important to file returns on a timely basis.
How do These Changes Impact Investors?
The delay in the start date RMDs will probably benefit many investors in a small way. Once someone is in their mid-to-late sixties, it becomes important to ensure that investments will produce the necessary liquidity to meet RMD requirements.
The clock starting later adds a bit of additional flexibility with respect to asset allocation.
The elimination of stretch distributions for inherited accounts is fairly significant.
Alternative asset investments in properties, limited partnership interests, mortgage notes and the like tend to be less liquid. The introduction of a fixed date by which plan investments need to be either liquidated or distributed in-kind could be problematic.
Inheritors of accounts will need to be cognizant of this timeline with respect to the asset allocation of the account. Investors deploying a self-directed 401(k) as part of a broader estate plan and a means to pass wealth to the next generations may need to revisit their strategy.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
