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3 Important Questions for Your Solo 401(k) Provider

solo 401(k) provider

It’s important to ask your Solo 401(k) provider these three questions before establishing the plan with that custodian, as not all Solo 401(k) plans have the same features.

As a small business owner, a self-employed individual or someone who earns a form of self-employment income, you can benefit from using the Solo 401(k) retirement plan. In the past, many small business owners and persons making self-employment income took advantage of the SEP IRA. At the time, the SEP IRA was the best solution if you didn’t have an employer-sponsored 401(k).

Today, more small business owners with no full-time employees, and self-employed individuals see the advantage of the Solo 401(k) vs. the SEP IRA.

Key Points 
  • It’s important to remember that not all Solo 401(k) providers are the same
  • Depending on the options you want, you may have to look at a specialty adminstrator
  • Here are the top three questions you should ask any Solo 401(k) provider before signing up

The Solo 401(k)

The Solo 401(k) retirement plan, also called an individual 401(k) or one-participant plan, is an IRS-approved retirement plan. It’s essentially like a traditional 401(k), except designed for one employee. However, not all Solo 401(k) plans are the same. The workings of the plan are highly dependent on the Solo 401(k) provider you choose.

For example, if you were to establish the retirement plan at Charles Schwab, your investment options will be restricted. Most financial institutions only provide traditional equities. As you may know, this includes stocks, bonds, mutual funds, ETFs, etc.

As a result, if you want to invest in real estate or precious metals, this option won’t be presented to you. The reason for this is, financial institutions, like Charles Schwab, generate commissions and fees only from traditional asset investments.

Self-Directed Solo 401(k) Plan

For small business owners and self-employed individuals who wish to invest in non-traditional assets, like real estate, you will benefit most from a Self-Directed Solo 401(k) provider. With the right Solo 401(k) provider, you can establish a self-directed plan. This allows you to make traditional, as well as non-traditional investments.

Additionally, you receive the option of gaining “checkbook control,” which gives you extra control of your 401(k) funds and investments.

There are many other benefits of working with a Solo 401(k) provider, which you can find in our Learn More pages.

3 Important Questions to Ask your Solo 401(k) Provider

When choosing the best Solo 401(k) provider, you need to determine the provider will satisfy your investment needs. Your provider should be able to answer any question you have regarding the plan. However, the three most important (and common) questions people ask their provider are: how to make a contribution, what type investments can you make, and how to borrow from the plan.

1. Make a Solo 401(k) Contribution

Contributions to a Solo 401(k) plan may seem trickier than making a contribution to other retirement plans. This is because you have two types of contributions. Your Solo 401(k) provider should be able to clearly explain both types of contributions.

You have:

  1. Elective deferral (employee contribution)
  2. Profit sharing (employer contribution)

As a self-employed individual or small business owner, you are both employee and employer, which is why you can make two types of contributions.

Elective Deferral: In 2023, the elective deferral contribution goes up by $2,000 from 2022. If you’re under 50, you can make an elective contribution of $22,500 to your 401(k) plan. If you’re at least age 50, you can make a $30,000 contribution – adding in the $7,500 catch-up contribution. Whereas, in 2022, if you were at least age 50, the maximum available employee contribution was $27,000.  Note – elective employee deferrals can be done in pretax or Roth.

Profit Sharing: Employer profit sharing contributions are a percentage based on each eligible plan participants’ compensation.  For a sole proprietor or a single member LLC, the maximum employer profit sharing contribution percentage is 20%.  However, for a C or S corporation earning a W-2, the maximum employer profit sharing contribution percentage is 25%. Employer profit sharing contributions must be made in pretax (but can be converted to Roth).  

Combined, for 2023, you can make a maximum contribution of $66,000 if you’re younger than 50 or $73,500 if you are at least age 50.  Whereas, in 2022, the maximum aggregate one could contribute to a Solo 401(k) plan, including employee deferrals and employer profit sharing contributions, was $61,000 or $67,500 if age 50 and older.  

2. What Investments Can I Make?

The most significant advantage of the IRA Financial Solo 401(k) plan versus one established at a bank or financial institution is checkbook control. IRA Financial is a self-directed retirement provider and does not sell investments or offer investment advice.  We are plan experts and focus on helping our clients manage and administer their plan. Hence, our Solo 401(k) plan documents are self-directed and open architecture, allowing the plan participant to essentially make any investment they wish, including alternative assets. Whereas, with a traditional Solo 401(k) plan, one is relegated to making traditional investments, such as stocks and mutual funds. 

In addition, the plan account is required to be opened at the bank or financial institution that provided the plan documents.  With the IRA Financial’s Solo 401(k) plan, the plan account can be opened at any local bank, including Capital One, Wells Fargo, and even Fidelity.  You can then make almost any traditional as well as alternative investments you want, including real estate, precious metals, cryptos, third-party lending, notes, stocks, private businesses, and much more.

There are only three types of investments the IRS considers “prohibited.” Essentially, you cannot invest in life insurance, collectibles (such as art), or any transaction that involves a disqualified person. Disqualified persons include lineal descendants and ascendants, and entities they control. So long as you follow these simple rules, you can invest in just about anything you want!

Read This: Solo 401(k): The Secret Weapon For Savvy Real Estate Investors

3. Taking out a Solo 401(k) Loan

A common question we receive at IRA Financial Group is about the Solo 401(k) loan. This is an important question to ask your Solo 401(k) provider, as it’s a unique feature you won’t find in many retirement plans.

You can take out a $50,000 loan, or borrow up to 50% of your account value (whichever is lower). You can use this loan whenever you like, for any purpose. It’s a tax- and penalty-free feature that’s become a popular vehicle to gain access to retirement funds.

You must repay the loan over a five-year period or less, with a payment frequency no greater than quarterly. The interest rate is set at prime, which is 7% as of December 1, 2022.

When it comes to the loan feature, you must ask your provider if their Solo 401(k) plan documents allow for it.

Get in Touch

It’s important to choose the right Solo 401(k) provider. Contact IRA Financial directly at 800-472-0646 and ask us any questions you have. Our 401(k) specialists are on-site and ready to answer all of your questions.


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