Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Self-Directed Solo 401(k)s for Alternative Investments
Transcript
- Lucas: Luna, I want to talk about a retirement vehicle that most people — even wealthy ones — completely overlook, but which can be a game-changer for entrepreneurs and high earners with side income. Luna: You mean the solo 401k? The one for self-employed people with no employees? Lucas: Exactly. But specifically the self-directed version. The solo 401k on its own is just a retirement plan. The self-directed variant lets you hold alternative assets — private equity, real estate, even crypto — inside that tax-advantaged wrapper. And the contribution limits for 2026 are generous: up to $70,000 for someone under 50, or $77,500 if you're 50 or older. Luna: That's because you can contribute both as employee and employer. So if you have a consulting business on the side, or you're a freelancer, you can put away a lot more than the typical 401k allows. Lucas: Right. The solo 401k is technically a one-participant 401k plan. You're both the employee — making elective deferrals up to $23,500 in 2026 — and the employer, making profit-sharing contributions up to 25 percent of net earnings from self-employment. Combined, that's $70,000. Luna: But the self-directed piece is what makes it interesting. Most brokerages only offer mutual funds and ETFs. With a self-directed solo 401k, you can write a check from the plan to buy a rental property or invest in a private startup. Lucas: That's the 'checkbook control' feature. You set up a special purpose entity — usually a limited liability company — owned by the 401k trust. That LLC can then open a bank account in the plan's name, and you, as the trustee, have the authority to make investments directly without needing a custodian's approval for every trade. Luna: So the typical custodian — like a big bank — is out of the picture. That's appealing for someone who wants to move fast on a private deal. Lucas: It's also appealing for tax efficiency. All income flows back into the 401k tax-deferred, or tax-free if you use a Roth solo 401k. And the solo 401k is one of the only plans that allows you to do a mega backdoor Roth — after-tax contributions up to the $70,000 limit, then convert to Roth. That's a huge advantage for wealthy families. Luna: But there are serious traps. The IRS has strict prohibited transaction rules. You can't invest in anything that benefits you personally while you're still in the plan. No buying a vacation home for yourself, no investing in your own business beyond a very narrow exception. Lucas: That's the big one. A prohibited transaction can disqualify the entire plan — all the assets become immediately taxable and subject to penalties. I remember a case from a few years ago where someone used their solo 401k to buy art, then hung that art in their personal home. The IRS said that was an indirect benefit — you were enjoying the artwork. Disqualified. Luna: Oof. And art is a classic alternative asset for the ultra-wealthy. So that's a cautionary tale. Lucas: Another trap: the solo 401k must have a written plan document and you need to file Form 5500-EZ once the plan assets exceed $250,000. A lot of people set up the LLC, start buying real estate, and forget the paperwork. Then the IRS comes back years later. Luna: And the solo 401k is only for people with no full-time employees other than a spouse. If you hire someone — even part-time — you lose eligibility. Then you have to switch to a regular 401k, which may not allow self-directed assets. Lucas: Right. So this is really a tool for the self-employed, the consultant, the real estate investor who wants to scale their portfolio inside a tax wrapper. For ultra-wealthy families, it's often paired with a family office — the solo 401k becomes one account in a broader structure. Luna: Let's talk about the specific mechanics of a common strategy: buying real estate inside the solo 401k. How does that actually work? Lucas: Step one: set up the solo 401k with a third-party administrator that offers self-directed documents. Step two: the 401k creates an LLC. Step three: you fund the LLC from the 401k — could be cash from a rollover, or fresh contributions. Step four: the LLC writes a check for the property. All rental income goes back into the LLC, then into the 401k trust. No tax on the income each year, and when you sell the property, gains are tax-deferred — or tax-free if it's a Roth. Luna: But you can't live in the property, can't use it as a vacation home, and you can't have your kids live there rent-free. The IRS considers that a prohibited transaction. Lucas: Correct. The property must be a pure investment. You also have to be careful about debt — if you use a mortgage, the plan may have to pay unrelated business income tax on the leveraged portion of the return. That's a niche rule, but it matters for real estate investors. Luna: Another popular asset is private equity — investing in a startup or a private company. With the self-directed solo 401k, you can buy shares in a private company, even if it's your own startup? Wait, that's a prohibited transaction, right? Lucas: Generally, yes. You can't invest your 401k in your own business unless you structure it very carefully. But you can invest in a third-party startup, or in a private fund. Many family offices use the solo 401k to invest in a co-investment vehicle alongside the family office's direct deals. Luna: So the solo 401k becomes a way to park retirement savings into the same high-return alternative assets the family is already accessing. Lucas: Exactly. And that's the real value for ultra-wealthy families — it's not about the tax deferral per se, although that's nice. It's about the ability to allocate retirement assets alongside their other capital, in the same strategies, with the same managers. It gives them another pool of money to deploy in private credit, venture capital, or real estate. Luna: But there's a practical limit: the solo 401k's total assets are capped by what you can contribute and roll over. For a truly wealthy family, the retirement account might be a small fraction of their net worth. So is this a big deal or just a nice optimization? Lucas: It can be both. For a high-earning entrepreneur in their 40s who's been maxing out a solo 401k for a decade, the account could easily be $2 million or more. That's not trivial. And if they can earn 15 percent in private real estate instead of 8 percent in public REITs, the difference over 20 years is huge. Luna: Let's talk about crypto. Self-directed solo 401ks can hold crypto too, right? Lucas: Yes, but with a wrinkle. You need a custodian that supports crypto — some of the self-directed IRA companies have partnerships with exchanges. Or you can use the checkbook control LLC to open an account at a crypto exchange in the LLC's name. Again, no personal benefit — you can't trade for your own account while the plan holds the same asset. Luna: And you have to value the crypto for tax reporting. The IRS wants fair market value each year, and crypto is volatile. That's a compliance headache. Lucas: It is. But for someone who believes in crypto as an asset class, doing it inside a Roth solo 401k means all gains — even massive ones — come out tax-free. That's a powerful incentive to deal with the paperwork. Luna: So who should actually considering this? Is it only for the ultra-wealthy, or can a mid-career freelancer with $200,000 in a rollover IRA benefit? Lucas: Anyone with self-employment income can set up a solo 401k. If you have an existing IRA or old 401k, you can roll that into the solo 401k — and then make it self-directed. The cost is maybe $500 to $1,500 to set up the plan documents and the LLC, plus ongoing administration fees. If you have at least $100,000 in retirement assets and you want alternative exposure, it's worth exploring. Luna: But you need a good third-party administrator. The big custodians like Vanguard or Fidelity won't allow self-directed assets in their solo 401k plans. You have to go to a specialty provider like Rocket Dollar, or Solo401k.com, or Nabers Group. Lucas: And you need a competent CPA who understands these rules. Not all tax professionals are comfortable with self-directed plans. If you're doing this, you want someone who has seen prohibited transaction audits before. Luna: Speaking of things that require careful planning — it occurs to me that the same attention to detail we're talking about with the solo 401k applies to the way our listeners support this show. If you've found our conversations helpful in thinking about your own financial decisions, we keep this podcast ad-free and rely directly on listeners who value it. You can support us at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Lucas: Yeah, and we'd be grateful. It's a small gesture that lets us keep digging into these niche strategies. Now, back to the solo 401k — one more nuance I want to hit, which is the backdoor Roth contribution strategy within the plan. Luna: Right, because the solo 401k is one of the few plans that allows in-plan Roth rollovers. You can contribute after-tax dollars — beyond the $23,500 elective deferral — and then immediately convert those to Roth. That's the mega backdoor Roth. Lucas: Exactly. For 2026, you can contribute up to $70,000 total. If you max the $23,500 as pre-tax, you can still put in $46,500 as after-tax and convert it. That's $46,500 of Roth space per year, on top of any other Roth IRA contributions. Over a decade, that's almost half a million dollars of after-tax money growing tax-free. Luna: But the plan must specifically allow these after-tax contributions and in-plan Roth rollovers. Not all solo 401k providers offer that. You have to choose one that does. Lucas: Right. And if you already have a solo 401k at a big brokerage, you can transfer it to a self-directed provider that supports the mega backdoor. It's not as hard as it sounds — it's just a rollover of the plan assets to a new plan document. Luna: One last thing: we should mention that the solo 401k can also be used for life insurance? That's a strategy some wealthy families use. Lucas: Yes, but it's extremely limited. The plan can buy life insurance on the participant, but the death benefit must be incidental — meaning the premium can't exceed a certain percentage of the account value. And the insurance must be a permanent policy, not term. It's a niche within a niche. Luna: So for most people, the real value is in alternatives and the mega backdoor Roth. Lucas: Absolutely. If you have self-employment income and you're looking to supercharge your retirement savings with alternative assets, the self-directed solo 401k is one of the most powerful tools available. Just don't hang any art in your living room that belongs to the plan. Luna: And definitely don't rent the plan-owned condo to your college roommate. Lucas: No prohibited transactions. Keep it clean, keep it documented, and you've got a remarkably flexible retirement vehicle. That's a wrap for this episode — next time we'll dig into how wealthy families use private placement life insurance for tax-deferred growth. Luna: Looking forward to it.