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Learn more | Solo 401(k)

How Can I Benefit?

What is a Solo 401(k) Plan?

A Solo 401(k) plan (also known as an individual 401(k) Plan or self-directed 401(k) Plan) is a retirement plan few of us are familiar with.

A solo 401(k) plan, or Individual 401(k) Plan, helps people who are self-employed. Additionally, if you’re an individual who generates a portion of your total income through self-employment activities, you, too, can benefit. Finally, small business owners with no full-time employees (except themselves or a spouse) can take advantage of a Solo 401(k) plan.

This plan is much like a traditional 401(k) plan, except it covers only one employee. So, basically it’s an IRS-approved plan for people who are self-employed or a sole owner-employee of a corporation. But it does have the same rules and requirements as a traditional 401(k).

A few main purposes of using a Solo 401(k) is to make employee referral contributions and for individuals to borrow/lend money or make investments. You can take out up to 50% or 50,000 from your retirement account – whichever is less.

Benefits of the Solo 401(k)

There are several benefits of using the Self-Directed Solo 401(k) if you're eligible for the plan. One of the primary benefits is you can reach your maximum contribution faster.

  • The total annual contribution for a self-directed Solo 401(k) is $56,000 (under 50) in 2019 with two kinds of contributions:
    • Employee salary deferral contribution: Employees can contribute up to $19,000
    • Employer profit-sharing contribution: The annual limit is 25% of the employee's pay, or 20% if you're self-employed
  • Catch-up contributions allow individuals 50 and older to contribute up to $62,000 to a self-directed Solo 401(k)

Other benefits of the plan include receiving a penalty-free $50,000 loan that you can use for any purpose. Additionally, the self-directed Solo 401(k) is easy to administer and highly cost-effective. We'll go over these benefits and more later on.

Why not Use an IRA for Your Retirement Funds?

The IRS created the Solo 401(k) to specifically help the above group of individuals. To break it down, that includes:

solo 401(k) planUnlike a traditional IRA, SEP-IRA or SIMPLE IRA, you can save more money, have more options to grow your retirement account, and it’s very cheap and easy to oversee. Additionally, with a Solo 401(k), you can invest in real estate and borrow money penalty and tax-free.

But these aren’t the only reasons why the Solo 401(k) is better than an IRA. Other benefits include:

  • No need to establish an LLC: LLCs can be costly, especially depending on which state you live in. With a Solo 401(k), the trustee (you) can make investments without the need of an LLC.
  • Strong Creditor Protection: Most states offer better creditor protection for this form of retirement plan than a Traditional IRA. Additionally, Individual 401(k) Plan assets are protected against creditor attack in a bankruptcy proceeding.
  • Roth After-Tax Benefit: You have two formats with a Solo 401(k): pre-tax, or Roth (after-tax). With a Traditional IRA, you only have the option of pre-tax. With the Roth option, your money can grow in its retirement account tax-free. And of course, when you withdraw at retirement, you pay no additional taxes.
  • Nonrecourse Leverage Exception: You can invest in your own business and real estate investments without penalty. By using nonrecourse funds, you won’t trigger the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI and UBIT). This exception doesn’t apply to IRAs.

Save More with High Contribution Limits

The 2019 Solo 401(k) plan states that an individual who is under the age of 50 can make a maximum employee deferral contribution in the amount of $19,000. If you qualify, you can make this contribution pre-tax or after-tax. This is great when you reach retirement age and your taxable income is most likely lower.

solo 401(k) plan

If you’re under 50, you can also benefit from the “one-participant plan” on the profit sharing side - your business can make a 25% contribution. In other words, you can take out 25% of your business’ profits and place it into your solo 401(k). In the case of a sole proprietorship or single member LLC, it’s a maximum 20% profit sharing contribution of $55,000 in 2019. If over 50, it’s $62,000. And this includes the employee deferral contribution of $19,000 (under 50) and $25,000 (over 50).

A Solo 401(k) Plan Gives You More Options

One of the many benefits of using a Solo 401(k) is that you grow your retirement account by diversifying your investments. Step away from traditional investments and spend your money on new opportunities. This can include real estate, tax liens, raw land, rentals, foreclosures, etc. This is possible if you choose a Self-Directed Solo 401(k) Plan.

All income and gains on these investments go back to your Individual 401(k) Plan tax-free. As trustee, you have full control to make any investment you want without custodian consent.

Are contribution options flexible? Absolutely. You can make contributions for any purpose. You also have the option to invest as much as legally possible, reduce, or suspend investments. Basically, you can make contributions. But there’s no requirement to do so.

Cheap and Easy Administration

People find the Solo 401(k) more attractive because of how easy it is to manage. Unless it is higher than $250,000 in assets, there are no filing requirements. If it does exceed that amount, then you must file Form 5500-EZ. This is a short information form that you to send to the IRS. If you wanted to, you could establish a Solo 401(k) at a traditional financial group, such as Vanguard. However, you don’t receive the same flexibility as if choosing IRA Financial Group’s Solo 401(k) Plan, or a plan from another self-directed IRA company. Let’s quickly compare establishing your Solo 401(k) Plan at IRA Financial vs Vanguard.

The benefits of IRA Financial Group’s Solo 401(k) Plan vs Vanguard’s Solo 401(k) Plan are noteworthy:

  • IRA Financial Group’s Individual 401(k) Plan allows for the conversion of a traditional 401(k) or 403(b) account to a Roth – such is not the case with Vanguard
  • They offer no loan feature, whereas we allow you to borrow up to $50,000 or 50% (whichever is less) from your IRA account
  • At Vanguard, you have no checkbook control, therefore, you’re restricted to traditional investments
  • Your Individual 401(k) Plan account must be opened at Vanguard – at IRA Financial Group, you can open your account at any local bank

We wrote the book on the Solo 401(k)

A simple, yet informative handbook, Going Solo: America’s Best-Kept Retirement Secret for the Self-Employed was written to help small business owners and self-employed individuals discover the many advantages of establishing a Solo 401(k) Plan.

In an effort to eliminate the complexity of how one can establish an individual 401(k) plan, Adam Bergman wrote Solo 401(k) in a Nutshell. The book “…simplifies the process (of establishing a Solo 401(k) while…providing everything one needs to maximize their retirement assets” and gain financial freedom.

Learn more about the books →

Get in Touch

So, are you ready to diversify your retirement portfolio, grow your funds tax-free and make investment decisions without custodian consent? Work directly with our retirement tax professionals to set up your Solo 401(k) today. Contact IRA Financial Group directly at 800-472-0646. You can also fill out the form to speak with an on-site 401(k) specialist.

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