A Solo 401(k) is a retirement savings plan designed specifically for self-employed individuals and small business owners without full-time employees, offering high contribution limits, tax benefits, and flexible investment options.
This guide covers the setup process, contribution rules, and management tips, referencing some of the top providers in the U.S.
Known for low-cost investment options and easy online management.
Offers a wide array of funds and solid reputation in investment management.
Provides extensive resources, low fees, and diverse investment options.
Known for flexibility in investments, including real estate.
Offers comprehensive customer service and robust trading tools.
Factors to Consider: Evaluate fees, investment options, online tools, and the specific features each provider offers.
Bundled vs. Unbundled Plans: Many providers offer “prototype” plans, bundling both the plan documents and the investment custodian services. Others might require a Third-Party Administrator (TPA) for more customized plans.
Key Components of a Solo 401(k):
Once you’ve selected a provider, complete the necessary paperwork to establish your Solo 401(k).
Required Information: Include your name, address, business type, and Employer Identification Number (EIN).
Traditional and Roth Accounts: If your provider supports both types, establish separate accounts for pre-tax (Traditional) and post-tax (Roth) contributions.
Employee Contribution: For 2024, the maximum employee contribution is $22,500 (or $30,000 if aged 50+).
Employer Contribution: Up to 25% of net earnings for self-employed or S-corp owners. Total contributions cannot exceed $66,000 for 2024 ($73,500 if aged 50+).
Calculating Net Earnings:
Contribution Timing: S-corp owners must make employee contributions before year-end. Employer contributions can be made until the business’s tax filing deadline, including extensions.
Payment Methods: Set up regular contributions via automatic transfers or make lump-sum payments as cash flow permits.
Contribution Tracking: Accurate tracking ensures compliance with IRS limits and smooth tax reporting.
Investment Options: Most providers offer a wide range, including stocks, bonds, mutual funds, ETFs, and even real estate with certain custodians.
Risk Management: Diversify investments to balance risk. Regularly review and rebalance your portfolio to align with retirement goals.
Self-Directed Accounts: Some providers (e.g., E*TRADE) offer self-directed accounts, which allow investments in alternative assets like real estate or private equity.
When to File: Required once Solo 401(k) assets exceed $250,000.
Purpose of Form 5500-EZ: Reports plan financial conditions and ensures compliance. Failure to file can result in penalties, so consult your provider or TPA for assistance.
Distribution Rules: Withdrawals from pre-tax accounts are taxed as regular income and may incur penalties if taken before age 59½.
Roth Accounts: Distributions are tax-free if the account has been open for five years and the account holder is at least 59½.
Required Minimum Distributions (RMDs): Generally start at age 73, although Roth accounts are exempt from RMDs while the owner is alive.
Setting up a Solo 401(k) is one of the most effective ways for self-employed individuals to save for retirement. By selecting a reputable provider and carefully managing contributions, you can enjoy tax benefits, flexible investment options, and significant growth potential for retirement.
For complex setups or high-contribution strategies, consulting a financial professional can help optimize your Solo 401(k) for long-term success.
Download the guide now and take the first step toward securing your financial future with a Solo 401(k). This guide is crafted to empower self-employed individuals and small business owners with insights into creating a tax-advantaged retirement plan tailored to your unique needs.
