Basics of Self-Directed 401(k)A 401(k) is a savings plan offered by employer wherein employees have the option to invest part of their earnings for retirement benefits. Some employers also make a corresponding matching contribution in the 401(k) plan. A traditional 401(k) offers a limited menu of investment options and in most case it is limited to selected stocks, CD's and mutual funds. Those investors who want to leverage their knowledge of investing in alternate assets to maximize returns of their retirement plan have the option to use the power of self-directed 401(k) also known as solo 401(k). Under this plan, you may also invest in foreign exchange, real estate, tax liens and precious metals. In case of a solo 401(k) the investor actively controls and directs the investments made under the 401(k). Self-directed 401(k) are allowed under the IRS, but awareness level is little and eligibility criteria restricts the number of self-directed 401(k).Eligibility for Setting up a Self-Directed 401(k) A self-directed 401(k) can be set up by a small business owner, where there are either no employees or employees if any are members of the immediate family. Thus a self-directed 401(k) is available to individuals engaged in self employment activity and having no full-time employeesContribution Limits in a Self-Directed 401(k)A self-directed 401(k) also allows for a higher contribution limit. The proprietor can act as both employer and employee and hence is allowed higher limits of annual contribution compared to other plans. The total contributions can be as high as $50,000 for business owners aged less than 50 and $55,500 for business owners age 50 and up.Tax Benefits under a Self-Directed 401(k)Like in case of traditional 401(k) retirement plan, the proportion of your earnings that is invested in a self-directed 401(k) is exempt from tax liability. The tax liability is deferred to the time when you decide to withdraw money from the account. As tax liabilities are deferred, you save more from your earnings, than you would if you'd not invested in a 401(k) plan. With a self-directed 401(k) you may direct these savings into more promising investment avenues to earn superior returns. These savings would compound over your life time to deliver you a comfortable retirement life.Tax Exemption in case of Leveraged Investment in Real EstateIf an investor in an Individual Retirement Account (IRA) buys real estate using debt, he will have to pay taxes on the extent of income that is due to investments made using debt.  This is not the case with a solo 401(k) plan. The investor can use debt to make real estate investment, without paying tax on the income that may be attributable to the investment made using debt.Rules to Remember while Investing in a Self-Directed 401(K)An investor should ensure that all his investment transactions are done at arm's length. This implies that a related party should not be a seller or buyer. Some examples of related persons include employees, family members of the account holder, or a trustee of the 401(k) account. Any transaction with a related person is prohibited and is liable to penalties.