The Solo 401(k) retirement plan, also called the self-employed 401(k) or individual 401(k), is similar to a traditional 401(k), except that it was designed to benefit business owners with no full-time employees (excluding themselves and perhaps a spouse).
The Solo 401(k) plan isn’t a new type of plan, and not all plans are the same. In this article, we’ll explain how to easily set up a Solo 401(k) plan to make traditional, as well as non-traditional investments.
Easily Set up a Solo 401(k)
You’re at the stage where you’re aware of the benefits of a Solo 401(k) plan – you may even have discovered the plan advantages from our Solo 401(k) benefits page.
Now, you wish to establish a Solo 401(k) because it satisfies your retirement, tax and investment goals.
Complete Your Plan Documents
In order to establish a 401(k) plan, you generally must have IRS approved 401(k) plan documents. There are three common ways to acquire IRS approved Solo 401(k) plan documents that your business will adopt.
Choose the Right Provider
With your provider, it’s important to ask questions. Two common questions people ask are how to make contributions with the Solo 401(k), and how to use the Solo 401(k) loan.
However, tailor your questions to your specific needs. At IRA Financial Group, you can call at 401(k) specialist for a free consultation. With the 401(k) specialist, you can answer any questions you may have regarding the Solo 401(k) retirement plan.
You have a few options when choosing a provider to set up a Solo 401(k) plan. Here are the three options you have to easily set up a Solo 401(k).
Financial Institution-Sponsored Solo 401(k) Plan
Going through a financial institution is one of the most common ways to establish a Solo 401(k) plan. Most major financial institutions and US banks, such as Vanguard and Charles Schwab, provide basic Solo 401(k) plan documents and investment opportunities. Typically, this comes at no fee.
Here’s the catch: the Solo 401(k) plan documents you adopt are very basic and often limit your options to making pre-tax employee deferrals and pre-tax profit-sharing contributions.
Additionally, financial institutions and US banks limit your Solo 401(k) investment options to the financial products they sell.
Custodian-Directed Solo 401(k) Plan
With a custodian-directed Solo 401(k) plan provider, you’re given the ability to make traditional investments, as well as IRS-approved non-traditional investments, like real estate and precious metals.
The custodian-directed Solo 401(k) plan option is generally attractive to retirement investors who want to make non-traditional investments with a Solo 401(k) plan with a third-party administering the plan.
This option generally offers Solo 401(k) plan participants the ability to make traditional investments, including stock, as well as IRS-approved nontraditional or alternate investments such as real estate, precious metals, private lending, and private business investments through a trust company.
The custodian-directed self-directed Solo 401(k) plan option is generally attractive to retirement investors looking to make nontraditional investments with their Solo 401(k) plan while having a third party administer the plan.
Open-Architecture Self-Directed Solo 401(k) Plan
The open architecture Solo 401(k) plan is quickly becoming the most popular self-directed retirement solution for the self-employed.
The beauty of the open architecture Solo 401(k) is that you can generally open a plan at most local banks. Also, it allows you (the business owner) to serve as trustee of the plan. This gives you complete control over the investments you choose to make.
Self-directed Solo 401(k) plans are provided by specialized plan provider companies. They can customize the plan based on your retirement and investment goals.
Most companies that offer self-directed open architecture Solo 401(k) plan documents are not typical financial institutions. In other words, they don’t sell financial products or house the Solo 401(k) plan account. They make money by selling the plan documents and offering advisory services regarding the features of the plan.
Transfer Retirement Funds to Solo 401(k)
When you choose your solo 401(k) provider and you set up your IRS compliant Solo 401(k) plan, transfer your retirement funds from your current custodian to a financial institution or credit union that can serve as your custodian. There is no fee, and the transfer is also tax-free.
Make a tax-free direct rollover to your new Solo 401(k) plan bank account. You can contact the specialists at IRA Financial Group can assist you in completing this step in setting up your Solo 401(k). We will expedite the process in a tax-free manner.
Open a Local Bank Account
You can open a local bank account for your individual retirement plan at any bank or credit union you choose. IRA Financial Group’s in-house 401(k) specialists can help you through this process in setting up your Solo 401(k) plan.
How to Contribute to the Solo 401(k)
The real difference between a Solo 401(k) and a traditional 401(k) is that you can make two types of contributions: employer contribution and employee contribution. This gives you the ability to increase your retirement savings faster.
If you are under the age of 50, you can make a maximum employee contribution in the amount of $19,000. The business can make a 25% profit sharing contribution up to a combined maximum of $56,000. This includes the employee contribution. For a sole proprietorship or single member LLC, the contribution is 20%.
For individuals 50 and over, you can make a maximum employee contribution in the amount of $25,000. Again, the business can make a 25% contribution – 20% in the case of a sole proprietorship or single member LLC. The combined maximum contribution (includes the employee deferral) is $62,000.
What to Consider When Setting up a Solo 401(k) Plan
1. Checkbook Control
A solo 401(k) plan allows you to have “checkbook control” over your IRA. As a result, you don’t have to pay high custodian fees. Instead, you can use a local bank or credit union to serve as your custodian.
A solo 401(k) plan with checkbook control allows you to take advantage of self-directing your retirement assets without incurring high custodian fees and custodian delays.
2. Solo 401(k) Pros and Cons
At some point in everybody’s life, you contemplate the dilemma of what retirement plan best suits your needs. Today, there are over 50 million individual retirement accounts. However, that doesn’t necessarily mean the IRA is the right retirement strategy.
Determining whether you can enhance your retirement savings with a Solo 401(k) (also known as the self-employed 401(k) or self-directed 401(k) plan) completely depends on whether you are self-employed and have a business.
There are a number of significant advantage to establishing a Solo 401(k) over an IRA.
- Higher Annual Contributions – Depending on your plan documents, you can make the high contributions we illustrated earlier with a Solo 401(k) retirement plan. Whereas, an IRA only allows a $6,000 contribution with a $1,000 “catch up” contribution if you’re 50 and older.
- Tax-Free Loan – You can borrow retirement funds tax and penalty-free from the individual 401(k). This loan is up to $50,000 or 50% of your account value (depends on which is less). On the other hand, an IRA offers no participant loan feature.
- Local Bank Account You Control – You can open your solo bank account at any local bank or credit union. You cannot do this with an IRA, Roth IRA or Self-Directed IRA. You benefit by serving as the trustee, which eliminates the expenses and delays of an IRA custodian.
- Roth Feature – The Solo 401(k) plan contains a built-in Roth sub-account. You can make contributions to it without any income restrictions.
- Real Estate Leverage – If you want to purchase real estate with your retirement funds, you can borrow nonrecourse funds for the real estate acquisition. You will not be subject to any Unrelated Debt Financed Income (UDFI) or Unrelated Business Taxable Income (UBTI or UBIT). This differs from an IRA, which can go as high as 37%.
3. Solo 401(k) Costs
Establishing a Solo 401(k) plan is now easy, simple, and cost effective. You can use the new IRA Financial app to set up a Solo 401(k) on your own.
With the app, you experience:
- Quick account set-up
- A secure platform
- Account maintenance options
- An intelligent and intuitive interface
Custodian Control Solo 401(k) Set-up
- Establishment Fee: $0
- Annual Fee: $360
Checkbook Control Solo 401(k) Set-up
- Establishment Fee: $899
- Annual Fee: $199
Get in Touch
If you still have questions about how to set-up a Solo 401(k), we encourage you to contact IRA Financial Group directly at 800-472-0646. We’re available to answer all of your questions. You can also fill out the form to speak with a 401(k) specialist.