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Solo 401(k)

How it Works

How the Solo 401(k) Works

How the Solo 401(k) Works

Solo 401(k) Plan (also known as the Individual 401(k) Plan or Self-Employed 401(k) Plan) is an IRS approved type of qualified plan. It’s a popular plan created by the Congress and IRS. The purpose of this plan is explicitly to benefit any business with zero employees except for the owners. The owner can establish their business as a sole proprietorship, LLC, corporation or partnership.

You may also know of this retirement plan as the “one-participant plan 401(k).” This isn’t a new type of plan. In fact, it’s just like the Traditional 401(k), except it only covers one person. It became more popular in 2002 when the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) came about.

Prior to that tax law change, people who were self-employed, generated a portion of their total income through self-employment activities and small business owners had no reason to establish a 401(k). They received the same advantages as with an IRA.

Today, the Solo 401(k) Plan is the most popular plan for small business owners and the like. First, it adds the employee deferral feature. This is an investment you place into a retirement account. You make the investment before taxes and the money goes into your account and builds interest. Because of the employee deferral feature, this retirement plan offers the highest contribution benefits to self-employed individuals. Essentially, it allows you to increase your maximum contribution.

Elibility Requirements

Eligibility Requirements

If you want to establish a Solo 401(k) and gain the benefits the plan has to offer, you must first meet the eligibility requirements.

The Solo 401(k) retirement plan offers many attractive features:

  • Higher maximum contributions
  • Borrow a five-year loan tax and penalty-free
  • Contributions to the Solo 401(k) plan are in pre-tax or after-tax
  • Make traditional and alternative asset investments

To take advantage of the plan, there are only two eligibility requirements you must meet.

  1. Self-employment: You must be self-employed as a sole proprietorship, single member LLC, partnership, C corporation or S corporation.
  2. No full-time employees: You cannot have full-time employees, except for a spouse or business partner(s).

It is believed that the IRS will consider you eligible for a Solo 401(k) if the business being conducted is a legitimate business that is run for the benefit of generating a profit.

Types of Contributions

Solo 401(k) Employee & Employer Contributions

The high contribution limits are the primary benefits of establishing a Solo 401(k) retirement plan. The maximum contributions for 2020 are $57,000 if you’re under 50 and $63,500 if you’re over 50. These are the maximum contributions, which you are not required to make. However, you cannot exceed the maximum contributions of a Solo 401(k).

When broken down, the Solo 401(k) contributions have two components.

Elective Deferral

First, there is the elective deferral which is the contribution you make as the employee. You can contribute $19,500 dollar for dollar (under 50) or $26,000 (over 50). You can make the contribution in pre-tax, Roth or after-tax.


The second type of contribution for a Solo 401(k) is the employer contribution, which is a percentage of your self-employment income or your schedule C if you’re a single member LLC or sole proprietor. This percentage is 20%.

If you’re a C corp., S corp., or W-2, the contribution is 25% of your compensation.

It’s important to note, you cannot defer more than you make. Therefore, if you only make $10,000, this is the highest amount you can defer.

Thanks to EGTRRA, the Solo 401(k) maximum contribution makes it the most popular individual retirement plans for small business owners and the self-employed. You can combine your employee deferral with your profit-sharing contribution and produce the highest maximum contribution limits.

How to Establish Your Solo 401(k)

How to Establish Your Solo 401(k)

  1. Open an Account: You need to open an account with a custodian that allows for non-traditional investments, like IRA Financial Trust.
  2. IRA Financial Mobile App: Establish your Solo 401(k) plan in just minutes using the free IRA Financial app for Apple and Android.
  3. Transfer/Rollover Funds: We will help you transfer or rollover your funds from your current custodian to the trust company, so you can gain checkbook control over your investments. With checkbook control, you are trustee of your Solo 401(k), and can make investments simply by writing a check or wiring funds from your bank account.
  4. Invest: Now you can make traditional investments, like stocks, and alternative asset investments, like real estate, notes, investment funds and even cryptocurrencies.

IRA Financial has partnered with Capital One Bank to simplify how you establish your Solo 401(k) plan. You will be assigned to a specialist who will set-up the Solo 401(k), open the plan bank account and complete all necessary documentation so you never have to set foot in a bank.  Thanks to the SECURE Act, you can establish your Solo 401(k) up until you file your tax return.  Previously, you had until December 31 in order to make contributions for that year.

How to Start a Solo 401(k)

How to Start a Solo 401(k)

A Solo 401(k) is a very cost-effective plan that's easy to administer. At IRA Financial Group, our 401(k) will help you start a Solo 401(k) plan and provide you with all documentation within approximately 48 hours.

To get started, you must fill out an application with your information, such as the adopting employer. From there, you will be assigned to a 401(k) specialist who will work with you one-on-one. A trust is created and IRA Financial group will obtain a tax ID # for that trust. Our team will create all of your plan documents based on the information you provide in the application.

We will send the information to you through email and provide you with instructions on how to open a bank account for your plan. You can do this at your local bank. At that point, when your account is open, you can instruct the previous custodian to rollover the funds to the new account. Additionally, you can make personal contributions to the Solo 401(k) based on your self-employment. From there, you can begin investing in non-traditional assets, like real-estate and private funding.

Did You Know?

You can use your Solo 401k to invest in real estate such as rental properties. Contributions to a plan can be made as both the employer and the employee, so you can maximize savings and growth.

going solo

solo 401(k) in a nutshell

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 →

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