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3 Important Questions for Your Solo 401k Provider

solo 401(k) provider

It’s important to ask your Solo 401k provider these three questions before establishing the plan with that custodian, as not all Solo 401k 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 vs. the SEP IRA.

The Solo 401k

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 a Solo 401(k) are highly dependent on the Solo 401k 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 401k 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 401k provider. With a Solo 401k provider, you can establish a self-directed Solo 401(k) plan. This allows you to make traditional and 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 401k provider, which you can find in our Solo 401(k) Learn More pages.

3 Important Questions to Ask your Solo 401k Provider

When choosing the best Solo 401k 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 Solo 401(k) plan. However, the three most important (and common) questions people ask their Solo 401k provider are: how to make a contribution, take out a distribution and take out a loan.

1. Make a Solo 401k 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 401k 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 2019, the elective deferral contribution went up by $500. Now, if you’re under 50, you can make a contribution of $19,000 to your retirement plan. If you’re over 50, you can make a $25,000 contribution – this is known as the $6,000 catch-up.

Profit Sharing: Again, the 2019 amount increased for the profit sharing contribution. No matter what your age, you can now contribute $37,000. This is a dollar-for-dollar contribution, which is based on the percentage of your income.

Combined, you can make a maximum contribution of $56,000 if you’re younger than 50. The $6,000 catch-up if your over 50 allows you to make a maximum contribution of $62,000.

2. Take out a Distribution

In order to take a distribution from a Solo 401(k) plan, you must have what is called a “triggering event.”

There are three common plan triggering events:

  1. You’re over age 59 1/2
  2. You leave your job
  3. Your company terminates the plan

In some cases, there are exceptions to access your plan funds without triggering an event, based off your employer’s 401(k) plan documents. It’s very important that you work with a Solo 401k provider to help you take advantage of all the available plan options for your retirement and investment needs.

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

3. Taking out a Solo 401k 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 401k provider, as it’s a unique feature you won’t find in any other retirement plan.

In a solo 401(k) retirement plan, you can take out a $50,000 loan, or take out 50% of your account value (whichever is lower). You can use this loan whenever you like, for any purpose.

It’s a tax-free and penalty-free feature, whereas if you tried to take out a loan in an IRA or traditional 401(k), you will receive an early withdrawal penalty.

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 3.50% as of March 28, 2022.

When it comes to the loan, a second question to ask your provider is whether their Solo 401(k) plan documents allow you to use the loan feature.

Get in Touch

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

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