What is a Self-directed 401(k)?

Key facts

  • A self-directed 401(k) offers participants more investment options than a standard 401(k).
  • Other than investment options, all other contribution and distribution rules remain the same.
  • Withdrawals before the age of 59 1/2 may incur an early withdrawal penalty.
  • After account holder turns 70 1/2, required minimum distributions must be taken.

A little known option in many 401(k) plans is self-directed investing. Although many employees appreciate the ease of enrolling in their employer’s 401(k) plan because most decisions are already made, not all participants want limited choices. Investment options are usually restricted, and often the choices are simplified further with specific suggestions for participants based on age group. For example, it is not uncommon to see investment options called target date investments that are broken down by decade.  Contributions are automatically moved from more aggressive funds for younger employees to investments that are more conservative for older employees.  Employers are almost required to offer this option by the Department of Labor.

However, a growing number of investors are acquiring more sophisticated financial knowledge. They may prefer to select their own investments rather than rely on pre-packaged target date funds from the plan custodian. In response, some employers now offer a self-directed 401(k) that permits interested employees to choose from a wider variety of securities instead of a specific list of mutual funds.  Note that plans offering a self-directed option must still comply with the IRS list of prohibited transactions when determining which investments are made available to employees.

Self-directed 401(k) Basics

When you choose a self-directed option, you will enjoy all of the traditional benefits that this 401(k) plans offers. Contributions are tax-deferred, which means that taxes are not due until the funds are withdrawn from the account. Self-directed 401(k) plan participants are held to the same annual contribution limits, which are reviewed and updated each year. The current maximum contribution is $18,500, with an additional catch-up amount of $6,000 permitted for participants age 50 and older.

Self-directed 401(k) accounts also follow the same withdrawal rules as traditional 401(k) accounts. For example, withdrawals before the age of 59 ½ may be subject to a 10% tax penalty, and account holders over the age of 70 ½ must take required minimum distributions.

2018 2017
Maximum Employee Contribution $18,500 $18,000
Catch-Up Contribution $6,000 $6,000
Maximum Employee + Employer Contribution $55,000 $54,000
Maximum Employee + Employer Contribution with Catch-Up $61,000 $60,000

Why Choose a Self-directed 401(k)?

The primary reason participants choose the self-direction option in their 401(k) is to have more control over their investment selection. Instead of choosing from a limited number of mutual funds and asset classes, self-directed 401(k) account holders can select from additional investment opportunities.

It is important to note that your employer chooses whether the self-directed option is offered, what percentage of your account can be self-directed, and what additional investment options, if any, are available. For example, in many cases you are offered a wider selection of mutual funds; however you cannot invest in other instruments, like individual stocks. On the other hand, some employers do permit the purchase of individual stocks.

Risks of a Self-directed 401(k)

Remember that when you assume control of your investments, you also take on the risks that your account custodian would otherwise be charged with overseeing. While 401(k) investments can and do lose value from time to time, the financial advisors selecting these investments do so with extensive research and experience. Be sure that you are willing and able to complete the in-depth research required to make the right choices for your retirement savings. In short, this option is designed to provide flexibility to sophisticated investors but may not be right for everyone.


Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.

This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.