Sailing solo can not only get lonely, it can also get dangerous. The same is true in using a self directed 401k. The difference, however, is that whereas in sailing solo, the dangers of sailing are conceivably compounded by your now-solo nature, when you use a solo 401k, the dangers are generally no different from those you would face in a regular, corporate-sponsored 401k. It is important, then, to know what would make you eligible for a solo 401k as well as what the associated dangers could be.

To be eligible for a solo 401k, you must essentially be a sole proprietor. Some partnerships are permitted to have self directed 401k plans, but getting that kind of financial advice is outside the scope of this article. You would have to sit down with a seasoned, honest financial advisor who could give you the dos and don’ts on partnership solo 401k plans. One hint we can give you, though, is that under an individual 401k, you are really only allowed to provide yourself and are only allowed to have your spouse on board as an employee. Once you start having other employees, it’s time to bring them on board with your 401(k) plan and to adjust your setup to reflect your newer, more corporate nature.

With that qualification aside, though, you need to understand that your self directed 401k is subject to the same risks as a corporate 401k. The biggest of these are the market changes. In the current market, it’s likely that many individuals have watched their 401k funds come down faster than the soon-to-be-new development out in the neighboring suburbs. If you invest in markets and funds, your cash does what those markets and funds do. But that’s fairly obvious.

Another concern with a solo 401k is that your investment options are more limited. Usually you have to work with an agency that sponsors individual 401k plans, meaning that you can only invest in the places that they will invest. Nevertheless, your self directed 401k may start to gain more options as the use of such plans continues to rise.

Possibly one of the most aggravating downsides of a self directed 401k (often for those who somehow didn’t hear it the first time) is that no matter the kinds of retirement funds available, federal law provides for you to make contributions only to a certain maximum limit. Whether you use that in one fund or split it between several, those limits are limits. If you have an IRA or an SEP or a profit-sharing plan already in place, you are contributing funds and that’s that.

Lastly, you will find that your solo 401k doesn’t just allow you to sail under all the Internal Revenue Code’s radar. There are requirements to conform to, some fees that have to be paid (usually only in terms of withdrawals, though), and lines to be toed. When you start considering the idea of setting up a self employed 401k plan, you want to make sure you know what’s required and where it is limited before you start to push out of your harbor.