Glossary
Every term you need to know for self-directed retirement investing, clearly defined and expert-verified.
Accredited Investor
A status defined by the SEC and deemed to be financially sophisticated. To qualify as an individual, one must have a net worth excluding primary residence in excess of $1 million (individually or jointly) or have two years of annual income exceeding $200,000 (or $300,000 jointly). An IRA or Solo 401(k) inherits the accreditation status of the account holder.
Adoption Agreement
A document used by a business to formally adopt a 401(k) plan. It specifies the unique features chosen for the plan, such as eligibility requirements, contribution types (Roth vs. Pre-tax), and vesting schedules. This agreement tailors the standardized plan document to the specific needs of the adopting employer.
Alternative Asset
Investment assets not typically available on a public exchange. Examples include real estate, private equity, mortgage notes, and tax liens.
Backdoor Roth IRA Contribution
A two-step strategy allowing high-income earners to bypass income limits on direct Roth IRA contributions. The individual makes a non-deductible (after-tax) contribution to a Traditional IRA and subsequently converts those funds to a Roth IRA.
Beneficial IRA
Any type of IRA (Traditional, Roth, etc.) that has been inherited from another individual such as a parent, spouse, or sibling. It is synonymous with an Inherited IRA.
Beneficiary
A person, trust, or other entity designated to inherit plan assets once the original account holder dies.
Bitcoin
A decentralized digital currency (cryptocurrency) that operates on a peer-to-peer network without the need for a central authority or bank. Transactions are secured by cryptography and recorded on a public, immutable ledger known as a blockchain.
BRRRR Strategy
A real estate investment cycle that stands for Buy, Rehab, Rent, Refinance, Repeat.
Catch-Up Contribution
Additional contributions allowed for IRA or qualified plan participants age 50 and older.
Certification of Trust
A condensed legal document that validates the existence of a trust and the Trustee's authority to act, without revealing the private details of the full Trust Agreement. It is commonly provided to banks, exchanges, and title companies to prove the account holder can legally sign for the plan. Notary signature is normally required.
Checkbook Control
The authority granted to a plan owner to execute investment transactions directly (writing checks, wiring funds) without passing every instruction through a third-party custodian. This is achieved by creating a special-purpose entity (LLC or Trust) owned by the plan, or by acting as Trustee of a Solo 401(k).
Collectibles
Items prohibited from IRA investment by IRC 408(m), including artwork, rugs, gems, stamps, and alcoholic beverages.
Contribution Limits
The maximum allowable cash deposit into a plan per tax year, which is adjusted periodically by the IRS.
Crowdfunding
The practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet.
Cryptocurrency
A digital or virtual form of currency that uses cryptography for security and operates on decentralized networks, typically based on blockchain technology. Unlike traditional fiat currencies (like the US Dollar or Euro), cryptocurrencies are generally not issued or controlled by any central authority or government.
Cryptocurrency Exchange
A digital marketplace where investors can buy, sell, or trade cryptocurrencies for other digital assets or traditional currency (like USD).
Cryptocurrency Wallet
A digital interface or physical device that stores the cryptographic Public and Private Keys required to access and manage blockchain assets. It does not store the actual tokens, but rather the authorization to move them.
Custodian
A regulated financial institution (bank or trust company) approved by the IRS to hold IRA assets.
Deduction Limits
The portion of a contribution to an IRA that may be deducted from the account holder's income for a given tax year. If the holder has access to an employer-sponsored plan elsewhere, the deduction may be limited based on income thresholds.
Direct Rollover
The act of moving funds from a qualified employer retirement plan (like a 401(k) or TSP) directly to an IRA or Solo 401(k). With a direct rollover, funds are issued directly to the receiving plan and there are no taxes or withholdings required.
Disqualified Person
Individuals prohibited from transacting with an IRA or plan to prevent conflicts of interest. This includes the account holder, their spouse, lineal ascendants (parents), lineal descendants (children/grandchildren), and service providers (fiduciaries).
Early Distribution
A distribution from an IRA taken before the normal retirement age of 59½. Early distributions are generally subject to a 10% penalty in addition to income tax unless an exception applies.
EGTRRA (2001)
The Economic Growth and Tax Relief Reconciliation Act of 2001. A landmark tax law that significantly expanded retirement savings incentives and portability.
EIN (Employer Identification Number)
A unique nine-digit number assigned by the IRS to identify a business entity or trust for tax administration purposes. While commonly associated with hiring employees, in the context of self-directed investing, it serves as the "tax fingerprint" for the legal structures holding plan assets.
Elective Deferral
The portion of compensation an employee voluntarily contributes to a 401(k). In a Solo 401(k), the business owner acts as the employee making these contributions.
ERISA
The Employee Retirement Income Security Act of 1974, a federal law that establishes minimum standards for retirement and health plans in private industry. It governs plans by imposing strict fiduciary duties on those who manage plan assets, requiring the disclosure of financial information to participants, and creating remedies for compliance violations.
Exclusive Benefit Rule
The IRS mandate that all plan activities must be for the exclusive purpose of providing benefits to the plan beneficiaries. Any action providing a current personal benefit to the account holder or a disqualified person violates this rule.
Fair Market Valuation (FMV)
The value at which an asset would sell on the open market between a willing buyer and seller.
Fiduciary
A person who exercises discretionary authority or control over the management of a plan. The account holder is a fiduciary to their own self-directed plan and must act for its exclusive benefit.
Form 1099-R
The IRS form used to report distributions (withdrawals) from pensions, annuities, retirement plans, and IRAs.
Form 5498
The form filed annually by the custodian to report the Fair Market Value (FMV) of the IRA to the IRS.
Form 5500-EZ
An annual informational return required for Solo 401(k) plans with total assets exceeding $250,000. It is due by July 31st.
Form 990-T
The tax return filed by an IRA or 401(k) to report and pay tax on UBIT or UDFI if the plan has gross income from these sources of $1,000 or more.
Full-Time Employee
An employee who completes 1,000 hours of service or more within a 12-month eligibility period. Full time employees are considered eligible employees for Solo 401(k) and SEP IRA qualification purposes.
In-Kind Distribution
Distributing an actual asset (like a property deed or crypto tokens) from the plan to the individual rather than selling it for cash. The asset must be appraised to determine the taxable value.
In-Kind Transfer
The movement of an asset (such as stocks, crypto keys, or a property deed) from one custodian to another without liquidating it into cash. This allows the account holder to change service providers while maintaining ownership of the specific investment.
Indirect Rollover (60-Day Rule)
A distribution from an IRA or qualified plan where the user receives funds personally and must redeposit them into a valid plan within 60 days to avoid taxes. Only one indirect rollover may be executed within a 12-month period.
Inherited IRA
Any type of IRA that has been inherited from another individual. These accounts have unique distribution rules and generally cannot receive new contributions. Sometimes referred to as a Beneficial IRA.
Interested Party
An individual or entity authorized by the account holder to receive information from a financial institution regarding the account assets, valuations, and activity, but with no authority to act on the account.
IRA (Individual Retirement Account)
A tax-advantaged investment account designed to help individuals save for retirement. The two most common types are the Traditional IRA, which offers tax-deferred growth (taxes are paid upon withdrawal), and the Roth IRA, which offers tax-free growth (taxes are paid upfront).
IRA Contribution
The placement of new funds into an IRA in a given tax year. Contributions must come from earned income and must be in cash.
IRA Distribution
When an IRA Account Holder or beneficiary takes cash or assets out of an IRA to themselves.
IRA Investment Trust
A specially designed revocable trust where an IRA is the grantor and beneficiary, and the account holder is the trustee. This provides checkbook control without the state registration fees of an LLC. Also referred to as an IRA Trust.
IRA LLC
A special-purpose Limited Liability Company owned 100% by an IRA. The IRA holder serves as the Manager, providing signing authority. This structure is preferred for liability-exposed assets like real estate.
IRA Transfer
The act of moving funds from one IRA to another IRA with similar tax treatment. All IRA transfers are initiated via a request from the receiving custodian.
LLC Manager
The individual designated in the Operating Agreement to manage the day-to-day affairs of an IRA LLC. In a checkbook IRA LLC, the IRA account holder is typically designated as the LLC manager.
LLC Operating Agreement
The primary governing document of a Limited Liability Company (LLC) that outlines the ownership structure, management responsibilities, and operating procedures. For an IRA LLC, this agreement specifically designates the IRA as the sole member and the account holder as the Manager, while including critical "Special Purpose" language to prevent Prohibited Transactions.
LLC Organizing Resolution
A formal document signed by the LLC Member (the IRA) that appoints the initial Managers and specifically grants them the authority to open and maintain business bank accounts. It serves as the "bridge" between the public state filing and the internal Operating Agreement, officially empowering the Manager to execute financial transactions.
LLC Periodic Report
An informational filing (often called an "Annual Report" or "Statement of Information") required by the Secretary of State to maintain a Limited Liability Company's "Good Standing" status. It typically updates basic company details like the business address and Registered Agent. Failure to file this report by the state deadline results in penalties and, eventually, the administrative dissolution of the LLC.
Long-Term Part-Time (LTPT) Employee
A classification established by the SECURE Act for employees who work at least 500 hours (but less than 1,000) for two consecutive years. LTPT employees are considered eligible employees for Solo 401(k) qualification purposes.
Mega Backdoor Roth Solo 401(k)
A strategy allowing Solo 401(k) participants to contribute up to the Section 415(c) limit using voluntary after-tax dollars. These contributions are immediately converted to a Roth account, bypassing the standard employee deferral caps to maximize tax-free basis.
Mineral Rights
The legal ownership of resources located below the surface of a property, such as oil, gas, gold, or coal. These rights can be sold or leased separately from the surface land itself, allowing the owner to profit from extraction royalties.
Non-Deductible IRA Contribution
A contribution to a Traditional IRA that does not reduce the account holder's taxable income for the year. This typically occurs when an investor participates in an employer-sponsored retirement plan (like a 401(k)) and their income exceeds the IRS deductibility thresholds.
Non-Recourse Loan
A loan secured only by the investment asset itself, with no personal guarantee. IRS rules mandate that any leverage used by an IRA or Solo 401(k) must be non-recourse.
Non-Traditional Custodian
A custodian that provides recordkeeping services necessary to document investments in non-traditional or alternative assets.
Normal Retirement Age
Generally age 59½. This is the age at which one can begin taking distributions from an IRA without a penalty for early distribution.
Participant Loan
A feature of the Solo 401(k) allowing the owner to borrow the lesser of $50,000 or 50% of the vested balance. It must be repaid with interest, usually over 5 years.
Plan Fiduciary
A person or entity that exercises discretionary authority or control over the management of a retirement plan or its assets. Under ERISA and IRS rules, a fiduciary must act solely in the interest of the plan's participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable expenses. The account holder of a Self-Directed IRA or Solo 401(k) is a fiduciary to their own plan.
Plan Participant
An eligible individual for whom the retirement plan is maintained and who holds an account balance within the plan. In the strict context of a Solo 401(k), participation is legally limited to business owners and their spouses.
Plan Sponsor
The business entity (Sole Proprietorship, LLC, Corporation) that adopts the Solo 401(k) plan. A valid plan sponsor is required for Solo 401(k) eligibility.
Power of Attorney (POA)
A legal document that authorizes one person (the Agent or Attorney-in-Fact) to act on behalf of another person (the Principal) in legal, financial, or medical matters. The scope of this authority can be broad (General POA) or restricted to specific transactions (Limited POA).
Private Equity / Private Placement
Capital invested directly into private companies that are not listed on a public stock exchange. This asset class often involves investing in startups, growth-stage businesses, or funds that acquire and restructure mature companies.
Profit Sharing Contribution
The employer's contribution to a Solo 401(k) or SEP IRA, calculated as a percentage of the business's net income or W-2 wages.
Prohibited Investment
Assets strictly forbidden by IRC 408(m), specifically Life Insurance and Collectibles. A prohibited investment is treated as if the value invested were distributed to the IRA account holder.
Prohibited Transaction
Any direct or indirect transaction between a plan and a Disqualified Person. Violations result in the total disqualification of the IRA or Plan and immediate taxation of all assets.
Promissory Note
A written legal instrument in which one party (the maker) promises to pay a determinate sum of money to another (the payee) under specific terms. It outlines the principal amount, interest rate, maturity date, and repayment schedule, serving as the legal evidence of a debt obligation.
Property Flipping
An active real estate investment strategy where a property is purchased, improved, and sold for a profit within a short timeframe (typically less than 12 months).
Qualified Charitable Distribution (QCD)
A tax-free distribution from a Traditional IRA directly to a qualified charity. Available to owners age 70½ and older.
Qualified Domestic Relations Order (QDRO)
A domestic relations order (judgment, decree, or property settlement approval) that creates or recognizes the right of an "alternate payee" (spouse, former spouse, child, or dependent) to receive all or a portion of the benefits payable to a participant in a qualified retirement plan.
Qualified Distribution
A distribution from an IRA that satisfies the requirements necessary to avoid penalties and taxes. For a Roth IRA, this requires a 5-year holding period and the account holder reaching age 59½.
Real Estate Syndication
A partnership where multiple investors pool capital to invest in a large real estate project (e.g., an apartment complex).
Registered Agent
An individual or business entity designated to receive official legal and government correspondence (such as Service of Process, lawsuits, and annual report notices) on behalf of an LLC. Every LLC is legally required to appoint a Registered Agent in its state of formation and in any other state where it is registered to do business.
REIT (Real Estate Investment Trust)
A company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs allow investors to pool their money to invest in a diversified portfolio of properties (like malls, apartments, or warehouses) and typically distribute the majority of their taxable income as dividends.
Required Minimum Distribution (RMD)
Mandatory withdrawals that must begin when the account holder reaches a specific age, determined by their birth year. Under SECURE 2.0, the starting age is 73 for those born between 1951 and 1959, and increases to 75 for those born in 1960 or later (starting in 2033). Roth IRAs are exempt from RMDs during the owner's lifetime.
ROBS (Rollover as Business Startup)
A structure allowing an entrepreneur to use retirement funds to capitalize a C-Corporation business without taxes or penalties. Unlike SDIRAs, a ROBS arrangement allows the investor to draw a salary and actively manage the business.
Roth Conversion
The taxable movement of pre-tax funds into a Roth account. The funds acquire tax-free status, with certain limitations on distributions in the first 5 years.
Roth IRA
An IRA that accepts after-tax contributions. Income from investments is not taxed, and qualified distributions are tax-free.
Roth Solo 401(k)
A feature within a Solo 401(k) allowing participants to make after-tax contributions.
Royalties
Payments made to an owner for the right to use their asset or property. In the context of mineral rights, a royalty is a percentage of the revenue generated from the production of oil, gas, or minerals, paid to the owner free of production costs. Royalties also commonly apply to intellectual property, representing payments to creators (such as authors, musicians, or inventors) for the use or sale of their work.
SECURE Act (2019)
Setting Every Community Up for Retirement Enhancement Act. A significant piece of legislation that overhauled retirement rules to increase access and savings.
SECURE 2.0 Act (2022)
A follow-up law that further expands retirement savings flexibility and incentives.
Self-Directed IRA (SDIRA)
A retirement account held by a non-traditional custodian that permits investment in alternative assets (real estate, crypto, private equity) in addition to standard stocks and bonds. While brokerage firms often use the term "self-directed" to mean you pick your own stocks, a "Truly Self-Directed IRA" specifically refers to an account capable of holding non-standard, alternative assets that most institutions cannot custody.
SEP IRA (Simplified Employee Pension)
A retirement plan that allows self-employed individuals and small business owners to contribute to their own retirement and their employees' retirement. Contributions are made only by the employer and are tax-deductible. The plan is easier to set up and administer than a 401(k), but does not allow for employee deferrals.
SIMPLE IRA
Savings Incentive Match Plan for Employees. A retirement plan designed for small businesses with 100 or fewer employees. It allows both employers and employees to contribute to Traditional IRAs set up for employees. Employers are required to make either matching contributions or non-elective contributions, providing a structured way to save for retirement with lower administrative burdens than standard qualified plans.
Solo 401(k)
A qualified retirement plan designed for self-employed individuals with no full-time non-owner employees. Solo 401(k) plans covering only business owners (and their spouses) are generally exempt from the complex Title I regulations of ERISA, which significantly simplifies their administration compared to corporate plans.
Solo 401(k) Amendment & Restatement
The formal process of updating a retirement plan's legal documents to maintain compliance with IRS regulations and reflect changing business needs.
Solo 401(k) Participant Account
A distinct sub-account within the plan ledger that tracks funds based on ownership and tax status. A compliant Solo 401(k) does not hold funds in a single "pot"; instead, it segregates assets to ensure accurate tax reporting. This segregation must occur at three specific levels of granularity:
Successor Manager
An individual designated in the LLC Operating Agreement to assume control of the IRA LLC only upon the death or incapacitation of the primary Manager. This ensures the entity remains operational without court intervention.
Successor Trustee
An individual designated in the trust instrument to assume control of the IRA Trust or Solo 401(k) plan only upon the death or incapacitation of the primary Trustee. This allows for immediate management of plan assets during transition events.
Tax Deed
A legal instrument that conveys ownership of a property to a government body or a new purchaser following a tax sale due to non-payment of property taxes. Unlike a tax lien (which is a claim on the property), a tax deed transfers the actual title to the new owner.
Tax Lien
A legal claim imposed by a government entity against a property or asset to secure the payment of unpaid taxes. A lien prevents the owner from selling or refinancing the asset until the tax debt is paid or the lien is released.
Tokenization of a Security
The process of creating a digital representation of a tangible or intangible asset (such as real estate, private equity, or debt) on a blockchain. These "security tokens" represent legal ownership or rights to the underlying asset.
Total 415(c) Limit
The combined limit for employee and employer contributions to a Solo 401(k).
Traditional IRA
An IRA that accepts contributions with pre-tax money. Income is tax-deferred until distribution, at which point it is taxed at normal income rates.
Trust Agreement
A legal document that establishes a trust, defines its purpose, and outlines the rules for how its assets must be managed. In the context of a Self-Directed IRA or Solo 401(k), the Trust Agreement appoints the account holder as Trustee, granting them the legal authority to hold title to assets and execute transactions on behalf of the retirement plan.
Trust Deed
A security instrument used in real estate transactions to secure a loan, involving three parties: the borrower (Trustor), the lender (Beneficiary), and a neutral third-party Trustee. The Trustee holds legal title to the property as collateral; if the borrower defaults, the Trustee is authorized to sell the property to repay the lender, typically through a non-judicial foreclosure process.
Trustee
The person designated to hold the property of a trust and administer it on behalf of beneficiaries. In a Solo 401(k) or IRA Trust, the account holder acts as Trustee, granting them legal authority to sign contracts.
Trustee-to-Trustee Transfer
The direct movement of funds between like-kind plans (e.g., IRA to IRA). These are non-reportable, tax-free, and not subject to the one-per-year limit.
Trustor
The individual or entity who establishes a trust by transferring assets into it and setting the rules for their management and distribution. In legal documents, the Trustor is frequently referred to as the Grantor, Settlor, or Creator.
Turnkey Real Estate
A residential or commercial investment property that has been fully renovated and, often, already leased to a tenant by a provider. It is designed to be an immediately cash-flowing asset requiring no initial rehabilitation or active management effort from the buyer.
UBIT (Unrelated Business Income Tax)
The tax paid when a tax-exempt entity such as an IRA generates taxable UBTI or UDFI.
UBTI (Unrelated Business Taxable Income)
Income generated when a tax-exempt entity engages in a trade or business on a regular or repeated basis.
UDFI (Unrelated Debt-Financed Income)
Income generated when a tax-exempt entity receives income from property acquired with the use of debt financing.