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IRA Financial Blog

AdBits Episode 30 – Am I Eligible To Set Up a Solo 401(k)

AdBits Podcast

IRA Financial’s Adam Bergman Esq. explains the eligibility rules to open and fund a Solo 401(k) plan, the best retirement plan for the self-employed, and the many benefits of the plan.

If you are self-employed, it’s up to you to be proactive in setting up a retirement plan for yourself. This is especially true if you do not have a plan through another job. But, which plan should you go with? Anyone can open an IRA, but is that enough. In this episode of AdBits, Mr. Bergman will detail who is eligible to set up a Solo 401(k) plan, which is arguably the best plan for anyone with self-employed income. However, not everyone can utilize the plan.

Are You Eligible for a Solo 401(k)?

Essentially, there are two requirements to start your own Solo 401(k) plan. First, is the presence of self-employment activity. You need your own business. This doesn’t mean you need to own your own company. Any self-employed individual can have a business, called a sole proprietorship. If you work for yourself, you can set one up. Types of self-employment activity include gig jobs, such as Uber or DoorDash, contract work, selling goods online (Amazon, Etsy, eBay, for example), tutoring, mowing lawns, etc.

The second requirement is the absence of any full-time employees, other than a spouse or business partner. Generally, if you have any employees who work 1,000 hours annually, or 500 hours in two consecutive years, you cannot fund a Solo 401(k). Independent contractors are allowed, no matter how many hours they work, since they are not considered employees of the business.

As long as you satisfy these two requirements, you can start saving with the best plan for the self-employed. In fact, Mr. Bergman mentions in the podcast that if given the option, he would tell all his clients to start a Solo 401(k). Unfortunately, not everyone is eligible. Lastly, you can utilize the Solo 401(k), even if you have a full-time job and contribute to a workplace plan. Just remember, that the annual contributions apply to all 401(k) plans in the aggregate. Therefore, if you contribute to another plan, it lessens the amount you may contribute to you Solo 401(k).

Why Go Solo?

Obviously, the Solo 401(k) plan is not the only retirement plan you can look into when you are self-employed. The most popular plan outside of a workplace 401(k) is the traditional IRA. You may contribute up to $6,000 (+$1,000 if age 50+) for 2021. If you self-direct the plan, you can invest in what you want. Another popular option is the Roth IRA. It shares many of the same benefits of the traditional option, however, when you are taxed is much different. Roths are funded with after-tax money and all qualified distributions are tax free. Traditional plans use pretax money so there’s an immediate tax benefit. Taxes are deferred until you withdraw. Both are great options for anyone saving for the future.

However, they don’t compare to the Solo 401(k). First off, you can contribute much more annually to a Solo 401(k). For 2021, you may contribute up to $58,000 plus an additional $6,500 if you are at least age 50. That’s almost ten times that of an IRA. Next, you can borrow from your 401(k). If you need the cash, you may take a loan of up to $50,000 from your Solo 401(k), or 50% the account balance, whichever is less. Further, you repay the loan (plus interest) back to the plan.

You also have the option of going with a Roth Solo 401(k). If you decide to in the future, you can roll over your Solo 401(k) to an IRA, and even convert a traditional plan to a Roth IRA.

Interested in investing in real estate? The Solo 401(k) is a no-brainer! If you use an IRA to make a real estate investment, and need to borrow funds for the purchase, you will be subject to UBTI. Unrelated Business Taxable Income must be calculated on any leverage used to buy the real estate. There is an exception to UBTI for 401(k) plans. You pay no tax when you need to take a mortgage on a property!

Lastly, unless your account value is greater than $250,000, there are no IRS filing requirements for the Solo 401(k). Once it reaches that number, you simply need to file an information form detailing the plan and its holdings.

Prioritize your Savings

You should always be thinking about your future. This is especially important for the self-employed. Find a plan (and a provider) that fits with your goals. You have the power to pick the plan that suits your needs and the types of investments you wish to make. You can’t get that with a workplace plan.

Take advantage of the power of tax deferral and compounding interest to let your money work for you. The old adage is to pay yourself first. Part of that is saving for your future, which you can better accomplish with the Solo 401(k) if you are self-employed.

Stay In Touch

We always appreciate our listeners and we hope you will continue to listen and spread the word. You can find AdBits on SoundCloud, YouTube or your favorite streaming platform. Thanks for listening and if you have any topics you want to see covered, give us a call @ 800.472.0646 today!


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