What is a Solo 401(k) plan?
A Solo 401k plan, otherwise known as a “one-participant retirement plan,” is designed specifically for self-employed and small business owners with no full-time employees (IRS considers workers who are employed over 1,000 hours per year to be full-time). The one-participant retirement plan is a cost-effective way for the self-employed to accelerate their retirement savings.
Solo 401k FAQ: Eligibility
Qualified participants include small business owners and self-employed individuals (such as independent contractors, consultants, and freelancers). Participants cannot employ full-time employees other than the business owner and his or her spouse.
All types of businesses are eligible: corporations, limited liability companies, partnerships, or sole proprietors.
As long as the employee works less than 500 hours a year, he or she does not need to be included in the 401k. In that case, you can still set up a Solo 401k plan.
You can either amend the plan to include the employee just like a traditional 401k, freeze the Solo 401k plan, or close it and roll over the funds into an IRA instead.
Solo 401k FAQ: Plan Setup
The plan must be established by December 31st of the current year. Depending on the business type, contributions to the plan can be made after year-end.
SECURE Act: The deadline to open a Solo 401k plan was extended under the act until tax filing day plus filed extension.
You can roll over the funds from a 401k, 403b, 457b, IRA or SEP IRA. Note that rollovers from a Simple IRA can only be done two years after the setup of the Simple IRA. The Solo 401k plan cannot accept rollovers from a Roth IRA account.
The Solo 401k offered by Sense Financial comes with checkbook control. As the plan owner, you can decide which bank to open an account for your Solo 401k plan. You decide where to deposit your funds and will be the only one with access to that bank account.
Solo 401k FAQ: Contributions
The Solo 401k allows two types of contributions: salary deferrals and profit sharing contributions. The salary deferral is limited to $22,500 in 2023. The profit sharing contribution is limited to 20 to 25% of the business profit. The total contribution limit, including profit sharing, is limited to $66,000 a year as of 2023.
For those who are over 50 years old, a $7,500 catch-up contribution is allowed, bringing the maximum contribution to $73,500.
If your spouse also participates in the Solo 401k plan, he or she is also allowed to contribute up to the contribution limit. The same contribution limit rules apply.
For a corporation’s employee, salary-deferral contributions must be funded throughout the year. Typically, if the corporation uses a payroll service, the employee elective deferral is deducted from the employee’s paycheck.
For sole-proprietors, both employee and profit-sharing contributions can be made up to the tax filing deadline.
No, you are not required to make contributions to the Solo 401k every year. You can contribute as little as you want or even suspend contributions during difficult years. However, in order to keep the plan in compliance, substantial contributions are required from time to time.
Solo 401k FAQ: Roth Solo 401k
Roth contributions are made after-tax. Instead of making deferred tax payments until the time of withdrawal, you will pay taxes up front for your Roth contribution. However, there will be no tax at the time of withdrawal, even on the earnings you make from investing the original amount.
You can contribute your salary deferral of up to $22,500 to a Roth Solo 401k in 20123 The catch-up contribution of $7,500 can also be made to the Roth account.
The biggest benefit of a Roth Solo 401k is that you will not have to pay any tax on your earnings. Because the taxes are already paid on your contributions, you can also withdraw the contributed amount at any time without paying tax or penalty.
Solo 401k FAQ: Investments
The Solo 401k plan can hold almost any legally available investment with the exception of insurance and collectibles. You can choose to invest your Solo 401k funds in stocks, bonds, mutual funds, real estate, precious metals, private lending, tax liens, trust deeds, and more.
With the self-directed Solo 401k plan offered by Sense Financial, you, the plan owner, will be the one to direct your own investments. There is no lengthy approval required, no transaction fee and no management fee from us.
It means that, as the trustee of your Solo 401k, you can make investments simply by writing a check or completing a wire transfer. This saves you time and money by not having to go through a custodian. With checkbook control, you can also set up the bank account for your Solo 401k and have direct access to it. You will be the only one who transfers the money in and out of the account.
You need to remember that you are acting on behalf of the plan. Make sure that all investment assets are titled under the name of the plan, and keep them separate from your business and personal investments.
You also need to avoid engaging in prohibited transactions. For more information, please read this page.
Solo 401k FAQ: Loan Options
You can borrow up to $50,000 or 50% of the total account value from your Solo 401k plan, whichever is less. The loan has to be paid back on at least a quarterly basis and is due in full after 5 years. The interest rate is prime rate plus 1% and is paid back into your account.
If you cannot pay back the loan on time, the loan balance will be seen as a distribution from your plan and will be taxed at your taxable income rate. If you are less than 59 ½ years old, an early withdrawal penalty will also apply on top of the income tax.
The borrowed amount can be used at your discretion. You can borrow the money for whatever reason you see fit, as long as you pay it back following the loan terms.
The Solo 401k Offered by Sense Financial
Sense Financial provides Solo 401k establishment services, which includes preparing plan documents and obtaining an Employer Identification Number (EIN) for your Solo 401k. We also provide unlimited client support and continuing compliance services for your Solo 401k plan, which includes assistance with filling tax forms when required, maintenance of the plan documents, assistance with transfers and rollovers, and more. Please see this page for more details.
Please contact us for the next steps to set up your Solo 401k or for any other questions you may have. You are entitled to a free consultation with one of our retirement planning experts.
What our Clients are Saying:
In my opinion, anyone that owns their own business should have a Solo 401K, and I would highly recommend Sense Financial – you will not be disappointed!
Ben D. – Spokane, WA
Sense Financial made the entire process extremely easy and they have been very responsive. I’ve recommended them to many people already.
Michael L. – Humble, TX
Dmitriy and his staff were consummate professionals. I rolled my Solo 401 (k) into a Self Directed Solo 401 (k). Dmitriy handled it smoothly and confidently…
Mindy Jensen – Longmont, CO
BiggerPockets Community Manager
Alternate investment options with your self-directed account:
Stocks & Bonds
Investments That Make Sense!
It’s Your Money. It’s Your Future. Invest Your Way.