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How to Set up a Solo 401k Plan

how to contribute to a solo 401k

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 401k 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 401k plan to make traditional, as well as non-traditional investments.

Easily Set up a Solo 401k Plan

You’re at the stage where you’re aware of the benefits of a Solo 401k plan. 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 401k 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.

IRA Financial’s Solo 401(k) plan allows you invest in alternative and traditional assets. While some Solo 401(k) providers only allow you to make traditional investments like stocks and bonds, IRA Financial allows you to invest in what you know. For example, individuals can invest in real estate, cryptocurrencies, hard-money loans, private companies, and more!

Learn More: Solo 401(k) Investments

You have a few options when choosing a provider to set up a Solo 401k plan. Here are the three options you have to easily set up a Solo 401(k).

Financial Institution-Sponsored Solo 401k Plan

Going through a financial institution is one of the most common ways to establish a Solo 401k plan. Most major financial institutions and US banks, such as Vanguard and Charles Schwab, provide basic Solo 401k plan documents and investment opportunities. Typically, this comes at no fee.

Here’s the catch: the Solo 401k 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.

Learn More: How to Correctly Diversify Your Retirement Portfolio

Custodian-Directed Solo 401k 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 401k plan option is generally attractive to retirement investors who want to make non-traditional investments with a Solo 401k plan with a third-party administering the plan.

This option generally offers Solo 401k 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 401k plan option is generally attractive to retirement investors looking to make nontraditional investments with their Solo 401k plan while having a third party administer the plan.

Open-Architecture Self-Directed Solo 401k Plan

The open architecture Solo 401k 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 401k 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 401k plan documents are not typical financial institutions. In other words, they don’t sell financial products or house the Solo 401k 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 401k 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 401k 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.

Learn More: How to Transfer Your Retirement Funds to a Solo 401(k)

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 401k plan.

How to Contribute to the Solo 401k

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.

Read More: How Much Can You Contribute to a Solo 401(k) in 2022?

Pros & Cons of a Solo 401(k)

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). A Solo 401(k) 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 401k 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 non-recourse 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%.

Importance of Selecting the Right Solo 401(k) Provider

There are several companies on the internet that advertise themselves to be a Solo 401k plan provider and expert. However, in most cases, the specialists who draft your Solo 401k Plan documents, as well as advising you, are not educated or trained tax attorneys or even tax professionals.

Many times, a salesperson or representative of a Solo 401k plan provider will offer you tax or ERISA guidance with respect to a 401(k) Plan feature or an investment, while lacking the adequate knowledge or expertise to do so. They may even tell you that you don’t need a trained tax attorney or specialized 401(K) plan tax professional to help you establish the plan. As a result, we have had to, on many occasions, help individuals who worked with a number of these companies who found themselves in some IRS trouble because they have made improper plan contributions or invested in a prohibited transaction as a result of being mislead by a Solo 401k plan provider representative that was not qualified to provide proper tax advice regarding the unique features of the Plan.

Working directly with a 401(k) Plan tax professional that has been specifically trained on the special tax aspects of the Solo 401k Plan to establish and maintain your Solo 401k is the only way you can guarantee your plan will remain in full IRS compliance and that you will not be engaging in any plan activities not approved by the plan or the IRS.

Work Directly With Trained Tax Professionals with an IRA Financial Group Solo 401k

Working with educated trained tax & ERISA professionals when looking for a Solo 401k plan provider is crucial in ensuring that your plan will be properly setup, as well as remain in full IRS compliance. The Solo 401k is based on the rules found in the Internal Revenue Code, which can be quite complicated to the someone without a tax professional background. Therefore, it is strongly advisable to work with a Solo 401k plan provider like the IRA Financial Group who was founded by a tax attorney who has written seven books on the topic of self-directed retirement plans, including two books on the Solo 401k plan.

Note – IRA Financial Group is not a law firm. IRA Financial Group does not provide legal services. Relying on the advice of a document processor or no-tax professional when it comes to establishing and maintaining your retirement plan puts your retirement future at great risk.

Too many times, plan participants have unknowingly violated IRS rules when operating their Solo 401k because a plan provider representative that was not qualified to provide relevant tax advice gave them inaccurate and incomplete tax advice or drafted the plan documents incorrectly. Make sure this does not happen to you – work only with qualified 401(k) Plan tax & ERISA professionals who have been specifically trained on the special tax aspects of the Plan to establish and maintain your Solo 401k Plan.

Just because your Solo 401k Plan has been established does not mean that you no longer need any ongoing tax and ERISA support. Most Solo 401k plan providers are headed for the exit once the plan has been established. As you begin administering your Solo 401k Plan, whether it involves making employee deferral or profit sharing contributions, making a non-traditional investment, taking a plan loan, or considering a Roth conversion, you will want to be able to have the ability to consult with our in-house trained 401(k) plan tax professionals. IRA Financial Group feels strongly that the ongoing maintenance of the Plan is crucial in making sure your Solo 401k remains in IRS compliance and that the IRS respects all your plan contributions and investment gains. Working directly with tax & ERISA 401(k) plan professionals that have been specifically trained on the special tax aspects of the Solo 401k Plan will help keep your IRA Financial Group Solo 401k in full IRS compliance.

Solo 401k with IRA Financial

The IRA Financial Group was founded by a group of top law firm tax and ERISA attorneys who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP. Over the years, we have helped thousands of clients establish self-directed 401k Plans. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and ERISA knowledge in this area is unmatched.

Did You Know?

Solo 401k plans with checkbook control are IRS approved, and they can be used to invest in more areas than traditional plans. Investments can be made in cryptocurrency, tax liens, mortgages, and the real estate market, as well as many other opportunities. The sky is the limit. Contact us today to get started.


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