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The Solo 401(k) Solution

The Solo 401(k) Solution

The Solo 401(k) Plan, also known as the Individual 401(k) or Self-Directed 401(k) Plan, is an IRS approved type of qualified retirement plan which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The Solo 401(k) plan is not a new type of plan. It is a traditional 401(k) plan covering only one employee.

As a self-employed business owner you know how important it is to maintain financial security for yourself and your family. The Solo 401(k) is designed for the self-employed and offers powerful features not found in traditional 401(k) or IRA retirement plans. Tired of being forced to invest in stocks or mutual funds? Have an investment opportunity, such as real estate or a business investment that you would love to make with your 401(k) funds? Then the Solo 401(k) is your solution!

In addition to the tremendous 401(k) benefits (tax-free profits, high tax contribution deductions – up to $62,000, asset protection and estate planning), the Solo 401(k) allows you to invest tax-free in investments that you know and understand and even allows you to borrow up to $50,000 or 50% of the account value for any purpose. Aside from certain “prohibited transaction” investments outlined in Internal Revenue Code Section 4975, a Solo 401(k) Plan can invest in most commonly made investments, including real estate, private business entities, public stocks, private stocks, and commercial paper.

A Solo 401(k) plan is perfect for any sole proprietor, consultant, or independent contractor. In addition, to being able to make high contributions (up to $62,000 for 2019) and borrow up to $50,000 tax-free, the Solo 401(k) Plan offers the same investment opportunities as a Self Directed IRA LLC, but without having to hire a custodian or create an LLC.

The Solo 401(k) Solution

Traditional IRA
SEP IRA
Solo 401K Plan
Maximum Annual Contributions $6,000 or $7,000 if individual is over the age of 50 25% of individual’s compensation up to $56,000 (20% in the case of a self-employed individual) $56,000, or $62,000 if individual is over the age of 50
IRA Custodian Required Yes Yes No – account can be opened at any local bank
Checkbook Control Yes – but only with a Self-Directed IRA LLC which requires the formation of an LLC Yes – but only with a Self-Directed IRA LLC which requires the formation of an LLC Yes – no LLC is required to be formed since the 401(k) Plan Trust is used as the investment vehicle
Loan Feature No No Yes – you can borrow $50,000 or 50% of your account value
Nonrecourse Financing Yes – but the nonrecourse financing would be subject to tax Yes – but the nonrecourse financing would be subject to tax Yes – generally no tax on the nonrecourse financing
Roth Feature No – must establish a Roth IRA which has income restrictions No – must establish a Roth IRA which has income restrictions Yes – no income restrictions
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