Solo 401(k) vs Self-Directed IRA: What’s the Difference?

Estimated reading time: 5 minutes

If you’re self-employed or own a small business, you may have more retirement account options than you realize. Two that often come up for investors interested in alternative assets are the solo 401(k) and self-directed IRA.

Both can provide tax advantages and, when self-directed, access to investments beyond traditional stocks and bonds. Where they differ most is in eligibility, contribution limits, account features, and how each plan is structured.

So, which one makes more sense for you? Let’s break down the differences between a solo 401(k) and self-directed IRA.

Key Features:

• Solo 401(k)s are designed for eligible self-employed individuals and business owners without common-law employees who meet plan eligibility requirements, while self-directed IRAs are available to a broader range of individuals.
• Solo 401(k)s may allow significantly higher annual contributions because the business owner can contribute as both the employee and the employer.
• Both solo 401(k)s and self-directed IRAs can be structured to hold alternative investments such as real estate, private equity, precious metals, and private lending.
• Solo 401(k)s offer features that IRAs do not, including participant loans and different tax treatment for certain leveraged investments.
• You may be able to maintain both a solo 401(k) and a self-directed IRA if you meet the eligibility and contribution requirements for each.
  

Table of Contents:

• What Is a Solo 401(k)?
• Why Consider a Solo 401(k)?
• How Solo 401(k) Contributions Work
• Who Is Eligible for a Solo 401(k)?
• What Is a Self-Directed IRA?
• Solo 401(k) vs Self-Directed IRA Contribution Limits for 2026
• Solo 401(k) vs Self-Directed IRA Investment Options
• Can You Have Both a Solo 401(k) and a Self-Directed IRA?
• Solo 401(k) vs Self-Directed IRA: Which One May Be Right for You?

What Is a Solo 401(k)?

A solo 401(k), also known as an individual 401(k), one-participant 401(k), or self-employed 401(k), is a qualified retirement plan designed for self-employed individuals and small business owners without common-law employees who meet plan eligibility requirements.

Eligible participants are generally limited to the business owner, a spouse who works for the business, and eligible business partners.

One of the biggest advantages of a solo 401(k) is its dual contribution structure. As a business owner, you can contribute to the plan in two roles: as both the employee and employer. This may allow you to contribute significantly more than a SEP or SIMPLE IRA.

For eligible freelancers, consultants, sole proprietors, and small business owners, a solo 401(k) can provide high contribution limits, Roth and pre-tax contribution options, plan loan flexibility, and access to alternative assets.

Why Consider a Solo 401(k)? 

For eligible self-employed individuals and business owners, a solo 401(k) can offer significantly higher contribution potential than an IRA, along with additional flexibility in how retirement funds are contributed, invested, and accessed. 

Higher Contribution Potential

One of the biggest advantages of a solo 401(k) is that the business owner can contribute in two ways: as the employee and as the employer.

For 2026, employee elective deferrals can reach $24,500. If you're age 50 or older, you can defer an additional $8,000 in catch-up contributions. If you're between ages 60 and 63, SECURE 2.0's higher catch-up provision increases that additional amount to $11,250.

The total number of contributions across employee and employer contributions per plan may not exceed $72,000. This combined limit does not include catch-up contributions.

Entrust's solo 401(k) also includes both pre-tax and Roth employee contribution options automatically, giving eligible business owners additional flexibility in how they save for retirement.

Participant Loans 

One feature that sets a solo 401(k) apart from an IRA is the ability to take a participant loan.

Entrust’s solo 401(k) allows participants to borrow up to the lesser of 50% of their vested account balance or $50,000, subject to IRS rules and plan requirements.

One important distinction is where the interest goes. Rather than paying interest to a bank or outside lender, the interest paid on a solo 401(k) loan is deposited back into the participant’s plan account.

The loan must still be properly structured and follow applicable requirements. It must charge a reasonable rate of interest, follow a repayment schedule, and generally be repaid within five years. A longer repayment period may be permitted if the loan is used to purchase a principal residence and the plan allows it.

A solo 401(k) loan is not the same as simply withdrawing money from the plan. If the loan is not repaid according to the required terms, the outstanding balance may be treated as a taxable distribution and could also be subject to a 10% early withdrawal penalty.

Potential Advantages for Leveraged Real Estate

A solo 401(k) can offer an important tax advantage for some real estate investors using leverage.

Unlike a self-directed IRA, a solo 401(k) may qualify for an exception from unrelated debt-financed income, or UDFI, on certain leveraged real estate investments. This means the debt-financed portion of qualifying earnings may not be subject to unrelated business income tax, or UBIT.

Loans must still be non-recourse, the same as with an IRA.

Additional Solo 401(k) Features 

A solo 401(k) can also provide features that are not available with an IRA.

• In-service withdrawals: Entrust's solo 401(k) allows in-service withdrawals while the participant is still operating the business, subject to the source of the funds and applicable plan requirements.
• In-kind rollovers: Eligible assets held in another retirement account may be rolled directly into a solo 401(k) without first being converted to cash, provided the asset has an established fair market value. Annual contributions cannot be made in kind.

How Solo 401(k) Contributions Work

A solo 401(k) has two contribution components:

Employee elective deferrals
As the employee, you may be able to defer eligible compensation into the plan up to the annual IRS limit. These deferrals may be made on a pre-tax basis, Roth basis, or a combination of both.

Employer contributions
As the employer, the business may also make an additional contribution based on income, compensation, entity type, and plan terms.

Together, these two contribution types can provide substantially more annual contribution capacity than an IRA.

Self-Directed IRAs: The Basics Guide Learn about your investment options, Self-Directed IRA rules, and much more! Download Now

Who Is Eligible for a Solo 401(k)?

To qualify for a solo 401(k), you generally need to have self-employment income and no common-law employees who meet plan eligibility requirements.

You may qualify if you:

• Have self-employment income from a trade or business. Eligible business structures can include sole proprietorships, LLCs, partnerships, S corporations, and C corporations.
• Have no common-law employees who meet plan eligibility requirements. A solo 401(k) is designed for business owners whose only eligible participants are themselves, their spouse, or eligible business partners.
• Have a spouse who works for the business. If your spouse earns eligible compensation from the business, they may also be able to participate in the plan.
• Have eligible business partners. Business partners may participate, provided the business does not have common-law employees who must be included in the plan.

Under applicable plan rules, a common-law employee may become eligible to participate after working at least 1,000 hours in a 12-month period, or between 500 and 999 hours in each of two consecutive 12-month periods, subject to applicable age requirements.

Independent contractors who receive Form 1099 generally are not eligible to participate in the business's retirement plan and do not, by themselves, disqualify the business from maintaining a solo 401(k).

Once a common-law employee becomes eligible to participate, the plan can no longer be limited to owners and may lose its solo 401(k) status. At that point, the plan may need to be amended, converted, or administered as a standard employer-sponsored 401(k) plan.

Now, let’s look at what a self-directed IRA is and how it compares for investors considering alternative assets.

What Is a Self-Directed IRA?

A self-directed IRA, or SDIRA, is an individual retirement account that empowers you to diversify your portfolio with alternative investments beyond the stock market.

Put simply, if you’re looking for a tax-efficient way to build a portfolio that’s more tailored to your interests and expertise, an SDIRA could be the answer.

Self-directed IRAs can be established as either traditional, Roth, SEP, or SIMPLE. Though, most investors choose between traditional or Roth accounts, depending on their tax and retirement strategy.

Traditional IRA Features

• Potential tax-deductible contributions
• Tax-deferred earnings
• Pay taxes when you take distributions on taxable amounts
• Required minimum distributions begin at age 73
• If you expect your tax rate to be lower in the future, contributing to a traditional IRA may lower your cumulative tax liability

ROTH IRA Features

• Pay income taxes now in return for tax-free growth on your investment earnings
• Provide tax-free income in retirement
• No required minimum distributions
• Withdraw your original contributions at any time without penalty
• If you expect your tax rate to be higher in the future, contributing to a Roth as opposed to traditional may lower your cumulative tax liability

Solo 401(k) vs Self-Directed IRA Contribution Limits for 2026

Solo 401(k) vs Self-Directed IRA Investment Options

Just like an IRA, a solo 401(k) can be self-directed, giving you greater investment flexibility and access to investments beyond traditional stocks and bonds.

When self-directed, both account types may hold a wide range of alternative assets, including:

• Real Estate
• Private Lending & Mortgage Notes
• Private Equity & Startups
• Cryptocurrency
• Precious Metals
• Tax Liens & Deeds

Important: Investments held in either account must follow applicable retirement account rules, including prohibited transaction requirements. Retirement assets must be used for the benefit of the account or plan, not for the personal benefit of the investor or another disqualified person.

When investing in alternative assets, the retirement account or plan should be identified as the owner or investor. Income generated by the investment should return to the account or plan, and related expenses should generally be paid using retirement funds.

Can You Have Both a Solo 401(k) and a Self-Directed IRA?

Yes. Having a solo 401(k) does not prevent you from maintaining a traditional or Roth IRA.

If you qualify for both account types, you may be able to use them together as part of your retirement strategy.

For example, an eligible self-employed investor might use a solo 401(k) for its higher contribution potential while maintaining a self-directed IRA for other retirement assets.

However, the contribution rules for each account still apply.

If you participate in another 401(k), 403(b), SIMPLE, or similar employer plan during the same year, your employee deferrals across plans may need to be coordinated. The employee deferral limit applies across all plans, not separately to each plan.

Solo 401(k) vs Self-Directed IRA: Which One May Be Right for You?

The right account depends primarily on your eligibility, contribution goals, and the features that matter most to your retirement strategy.

A solo 401(k) may be worth considering if you have qualifying self-employment income and want higher contribution potential. Because you can contribute as both the employee and employer, a solo 401(k) can allow you to contribute significantly more each year than an IRA.

A self-directed IRA may be a better fit if you want access to alternative investments but do not qualify for a solo 401(k), or if you prefer the IRA structure. Self-directed IRAs are available to a broader range of investors and can hold many of the same alternative investments as a solo 401(k).

And for some investors, it may not be an either-or decision. If you qualify for both, you may be able to maintain a solo 401(k) and a self-directed IRA at the same time, giving you additional flexibility in how you save and invest for retirement.

Want to compare your options further? Explore Entrust's solo 401(k) and self-directed IRA resources to learn how each account works.

Frequently Asked Questions About Solo 401(k)s vs Self-Directed IRAs

1. What is the main difference between a solo 401(k) and a self-directed IRA?

The main difference is eligibility and contribution structure. A solo 401(k) is designed for eligible self-employed individuals and small business owners, while a self-directed IRA is available to a broader range of individuals.

A solo 401(k) also allows contributions in both the employee and employer roles, which can provide significantly higher contribution potential than an IRA.

2. Can I have both a solo 401(k) and a self-directed IRA?

Yes. If you meet the eligibility requirements for both account types, you may be able to maintain a solo 401(k) and a self-directed IRA at the same time.

3. Which has higher contribution limits: a solo 401(k) or self-directed IRA?

A solo 401(k) may afford much higher contribution limits than a self-directed IRA.

Because a solo 401(k) allows you to contribute as both the employee and the employer, eligible business owners may be able to contribute significantly more each year than they could to an IRA.

4. Can both a solo 401(k) and self-directed IRA invest in real estate?

Yes. Self-directed versions of both a solo 401(k) and an IRA can invest in real estate.

Examples include rental properties, commercial real estate, raw land, and mortgage notes.

5. Can I borrow money from a Solo 401(k) or Self-Directed IRA?

Entrust's solo 401(k) allows participant loans.

The maximum loan amount is the lesser of 50% of the participant's vested account balance or $50,000, subject to applicable plan and IRS requirements.

A self-directed IRA does not permit participant loans.