Menu Close

IRA Financial Group Blog

Solo 401k Eligibility and Frequently Asked Questions (FAQ)

Solo 401(k) FAQ
5 Minute Read

If you are interested in establishing a Solo 401k, review the following frequently asked questions to determine Solo 401k qualifications and learn basic features of the Solo 401k plan.

Solo 401k FAQs

What is a Solo 401k Plan?

A solo 401k is a qualified 401k retirement plan specifically designed for one participant. The retirement plan is designed for employers who have no full-time employees other than themselves, a business partner and a spouse.

Also called a self-employed 401(k), self-directed 401(k) or one participant plan, the Solo 401k became popularized when congress passed the Economic Growth Tax Relief Reconciliation Act (EGTRRA) in 2001. Prior to EGTRRA, self-employed workers and small business owners could establish retirement plans unique to self-employed individuals that lacked benefits of the employer-sponsored 401(k).

Is an Individual 401k the same as a Solo 401k?

While the Solo 401k and Individual 401k are both owner-only retirement plans, the individual 401k is typically offered by brokerage firms and traditional financial institutions. Whereas a Solo 401k plan is generally offered by Self-Directed custodians who administer the plan, such as IRA Financial Trust.

Traditional institutions and brokerage firms generally limit participants to the financial products they sell, such as stocks, bonds, mutual funds, ETFS, etc., while a Self-Directed custodian gives clients the freedom to make alternative investments (real estate, precious metals, foreign currency, etc.) as well as traditional investments.

Who qualifies for a Solo 401k?

To qualify for the Solo 401k plan, you must be self-employed and generate some form of self-employment income and provide proof. If you are the owner of a business, you must not have full-time employees, excluding yourself, business partner(s) and a spouse who is involved in the business.

How much can I contribute to my Solo 401k?

The maximum contribution for a Solo 401k in 2020 is $57,000 for participants under age 50 and $63,500 for participants age 50 and older. Solo 401k participants can make two types of contributions to meet the maximum contribution limit. Click here for current contribution limits.

What are the Solo 401k contribution types?

There are two types of Solo 401k contributions.

Elective deferral: As an employee of a self-employed business with no full-time employees, you can make an employee contribution known as the elective deferral. The solo 401k employee contribution in 2020 is $19,500 if you’re under age 50 and $26,000 if you’re 50 and older.

Profit Sharing: As the employer of a self-employed business with no full-time employees, you can make an employer contribution known as a profit sharing contribution. Unlike the elective deferral, the profit sharing contribution is based on a percentage of income. For 2020, you can make a contribution of $37,500 whether you are under or over 50 years old.

Learn more about the 2020 Solo 401k contribution limits.

Can a spouse contribute to the Solo 401k?

If your spouse is involved in the business and earns compensation from it, he/she can contribute to the Solo 401k plan. The spouse can make separate and equal contributions increasing the couples’ annual total contribution to $114,000 for 2020 or $127,000 if both spouses are over age 50.

Does a Solo 401k Plan allow for Roth contributions?

Most 401k plans do not allow for a Roth-type contributions. However, the Solo 401k plan at IRA Financial allows participants to treat contributions that would otherwise be elective deferrals as designated Roth contributions. The Roth feature of a Solo 401k only allows after-tax salary deferral contributions. No employer contributions and no pretax employee contributions are permitted.

Most of the Solo 401k rules that apply to a regular 401k plan also apply to a Roth 401k plan.

What is a Solo 401k Plan loan?

The Solo 401k plan allows participants to borrow up to $50,000 or 50% of the account value – whichever is less. The Solo 401k loan is tax and penalty-free and can be used for any purpose.

How do I pay off the Solo 401k Loan?

Solo 401k participants must repay the loan over an amortization schedule of five years or less. Payment frequencies must be no greater than quarterly. The interest rate must be set at a reasonable rate of interest, generally set at prime rate as per the Wall Street Journal. As of 8/15/19, the prime rate is 5.25%. The Interest rate is fixed based on the prime rate at the time of the loan application.

Can my spouse borrow the Solo 401k loan?

If your spouse participates in the business and earns an income, you and your spouse can borrow up to $50,000 ($100,000 total).

What investments can I make with a Solo 401k?

Popular investments you can make with a Solo 401k include:

Residential or commercial real estate
Raw land
Foreclosure property
Mortgage pools
Private loans
Tax liens
Private businesses
Limited Liability Companies
Limited Liability Partnerships
Private placements
Stocks, Bonds, Mutual Funds
Most currencies

A Solo 401k lets you use your retirement funds to make virtually any type of investment that is IRS approved.

Can I have a Solo 401k and a regular 401k?

In answering the question of whether you can have a Solo 401k and a regular 401k, it is important to remember that individuals can be part of more than one 401k at a time,, such as your work sponsored 401k and also be a part of a Solo 401k if he/she generates self-employment income.

Can I have a Solo 401k plan and SEP IRA?

It is good practice not to have a SEP IRA and Solo 401k plan open at the same time. According to IRS Form 5305, any employer who establishes a SEP IRA using the form cannot have both a SEP IRA and Solo 401(k) Plan opened at the same time.

The main reason is that both plans have employer profit sharing options. However, if a bank or IRA custodian establishes the SEP IRA by using an individually drafted document other than IRS Form 5305, then an employer can have a SEP IRA and Solo 401k plan at the same time. However, this is quite uncommon.

What commonly occurs is that an employer will have a SEP IRA and make contributions to it and then open a Solo 401(k) plan. Then the employer will roll the SEP IRA contributions tax-free into the plan. The employer will then close the SEP IRA and only keep the Solo 401(k) plan.

Can I contribute my entire salary to the Solo 401k?

Solo 401k participants can contribute their salary to the Solo 401k plan dollar-for-dollar, at a maximum of $19,500 (or $26,000 if age 50 and older) for 2020. However, you cannot contribute more than you earn from that business.

Is a Solo 401k Plan subject to ERISA?

The ERISA rules and regulations do not apply to a Solo 401(k) Plan since there are no common law employees to protect since the only employee(s) is the business owner(s) and spouse.

How can I start a Solo 401k?

First, open an account with a custodian that allows for alternative investments if you wish to invest in real estate, precious metals, tax liens and more. Transfer/rollover funds from your current custodian to the new custodian. Setup time for the Solo 401k generally takes one or two days to complete.
Learn more about how to get started with a Solo 401k plan.

Is a Solo 401k protected from creditors?

Solo 401k plans are protected from creditors in a bankruptcy proceeding.
Corporate retirement plans have long been safe from creditors, thanks to the Employee Retirement Income Security Act of 1974, commonly known as ERISA.

How do I maintain a Solo 401k plan?

The Solo 401k plan is easy to operate. There is generally no annual filing requirement unless the plan exceeds $250,000 in assets. In such a case, you will need to file a short information return with the IRS (Form 5500-EZ).

Beyond this Solo 401k reporting requirement, you must maintain basic reporting requirements. This essentially means you must keep all records, receipts, contracts relating to the Solo 401(k) and its investments on file.

Get in Touch

To learn more about the Solo 401k plan, we encourage you to download our free Solo 401k info kit. To get started, quickly and easily establish the Solo 401k on our free app and contact IRA Financial at 800-472-0646 and a specialist will help set you up.

Did You Know?

A Solo 401k plan allows contributions as both the employee and the employer which allows for maximum benefit. This makes the Solo 401k the most popular plan for the self-employed. Contact us now and learn more!

Related Articles