Solo 401k

What is a Solo 401k?

The term Solo 401k is commonly used to refer to the “Individual 401k”. Also known as a Self Employed 401k, Personal 401k, Uni-k and Single k this new self employed retirement plan is expected to revolutionize the way successful self employed business owners save for their retirement. The Solo 401k is not a new type of 401k plan, but is simply a traditional 401k plan covering a business owner with no W-2 employees (other than themselves, their spouse or their partner in a partnership). A Solo 401k is much less expensive administratively then a traditional 401k that has full time W-2 employees.

The Solo 401k is unique because compared to other self employed retirement plans greater contributions may be made at identical income levels, therefore maximizing retirement contributions and valuable tax deductions. The 2023 Solo 401k contribution limits are $66,000 or $73,500 if age 50 or older. Because of the way the contribution is calculated a larger contribution usually can be made into a Solo 401k than to a Keogh plan, SEP IRA or SIMPLE IRA at the same income level. Only the Solo Defined Benefit Plan can potentially allow a greater contribution than a Solo 401k, however a Defined Benefit Plan is much more expensive administratively and has mandatory annual funding requirements. As a result the Solo 401k is popular choice for sole proprietors who want the option of making a significant contribution and having the flexibility of completely discretionary contributions. A sole proprietor can increase, decrease or stop contributions to a Solo 401k each year.

Another advantage of the Solo 401k that is unique is ability to access money tax free using a Solo 401k loan. 401k loans up to 50% of the total 401k value up to a $50,000 maximum are permitted in a Solo 401k plan. IRS rules do not allow loans with an SEP IRA, Keogh plan or SIMPLE IRA.

Self employed business owners may be well suited for a Solo 401k if their objective is to maximize their retirement contributions or if they would like to borrow from their retirement plan using a Solo 401k loan. No other self employed retirement plan offers such large tax deductible contributions with such flexibility from year to year with ease of set up and maintenance, and with the most generous catch up provisions for those age 50 or older.

Who is eligible for a Solo 401k?

If the business owner is the only employee or if the only employees are the business owner and spouse or if the business is a partnership that employs only the partners and has no W-2 employees, then the business owner may be eligible for a Solo 401k. Sole proprietorships, partnerships, LLCs and corporations (including both subchapter S and C corporations) would qualify.

A small business owner with W-2 employees is eligible for a Solo 401k provided each W-2 employee works less than 1,000 hours per calendar year. A small business owner is ineligible for a Solo 401k if they have W-2 employees who work more than 1,000 hours per year. Business owners and their spouse do not apply to this 1,000 hour threshold.

Independent contractors (1099 employees) employed by your business are excluded from the Solo 401k plan and as a result would not disqualify you from having a Solo 401k regardless if they work more than 1,000 hours in a calendar year.

Learn more about Solo 401k Eligibility.

What investments can be selected in a Solo 401k?

The investments that can be selected within a Solo 401k plan depend on the Solo 401k provider and can be divided into 3 general categories:

  1. Solo 401k with one mutual fund family.
  2. Solo 401k with multiple mutual fund families and stock trading.
  3. Solo 401k investing in real estate, tax liens, gold and other alternative investments.

Learn more about Solo 401k Providers.

What type of Solo 401k does BCM setup for clients?

If you search online you will find that several types of Solo 401k plans that are available. Some of these self directed 401k plans allow investors to invest in alternative investments like gold, tax liens and real estate. Some Solo 401k plans allow you to do complex transactions in which you can buy shares of stock in your business. These 401k plans are complex, very expensive (sometimes thousands of dollars to setup and have high annual maintenance fees) and may have potential complications with the IRS.

A simple alternative to these complex plans would be to set up a Solo 401k that uses mutual funds as the investment choice within the 401k. US corporations traditionally have had mutual funds as the investment vehicle within their 401k plan and 401k participants are usually familiar with this type of investment option. A Solo 401k that uses mutual funds as the investment option can be inexpensive administratively. BCM works with several Solo 401k providers, however the Solo 401k we recommend most frequently to our clients costs $0 to setup and $15 annual fee (the $15 fee is waived with a $50,000 balance). The 401k loan fees are $50 application fee and an annual fee of $25. Through this 401k there are over 50 mutual funds to choose from ranging from conservative bond mutual funds to aggressive stock mutual funds to accommodate investors based on their age, time horizon and personal risk tolerance. Contact us and we would be happy to provide more information about this Solo 401k.

Benefits of a Solo 401k

Solo 401k Loans – Tax free loans are permitted with a Solo 401k plan. Loans up to 50% of the total value of the Solo 401k up to a maximum of $50,000 are permitted. IRS rules do not allow loans with IRAs, SEP IRAs, or Keogh (Money Purchase/Profit Sharing Plans).

Solo 401k Contribution Limits – In 2023 the Solo 401k contribution limit is $66,000 or $73,500 if age 50 or older. The annual contribution into a Solo 401k consists of 2 parts: a tax deductible salary deferral contribution plus an additional tax deductible profit sharing contribution.

  1. Salary Deferral Contribution
    In 2023, 100% of compensation up to a maximum of $22,500 ($30,000 if age 50 or older) can be contributed in salary deferrals. For a corporation compensation is based on W-2 wages. For businesses taxed as a sole proprietorship compensation is based on net adjusted business profits. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 50% of the self employment tax (FICA and Medicare).

  2. Profit Sharing Contribution
    A tax deductible profit sharing contribution can also be made. For corporations the profit sharing contribution is based on W-2 wages and can be made up to 25% of W-2 compensation. For sole proprietorships a profit sharing contribution can be made up to 20% of net adjusted business profits.

The maximum allowable Solo 401k contribution limit calculation simply adds the profit sharing contribution to the maximum salary deferral contribution amount to produce the total allowable contribution. The salary deferral and profit sharing contribution can not exceed the Solo 401k contribution limit. Compared to other self employed retirement plans such as a Keogh Plan or SEP IRA you may be able to contribute more with a Solo 401k at identical income levels, therefore maximizing retirement contributions and tax deductions.

Solo 401k Calculator – Use the calculator to determine the annual retirement contribution you could make into a Solo 401k based on your income. The calculation of how much can be contributed to the Solo 401k is dependent on whether your business is taxed as a corporation and you receive a W-2 or net adjusted business profits if you are taxed as a sole proprietorship.

Solo Roth 401k – Solo 401k salary deferral contributions can be made as Roth 401k (after tax) or Traditional 401k (pre-tax). The basic difference between a Roth 401k and a Traditional 401k is that the Roth 401k is funded with after-tax contributions while the Traditional 401k is funded with pre-tax contributions. In other words, with a Roth 401k you pay taxes today in return for a tax-free withdrawals in retirement. Traditional 401k contributions are tax deductible and are made pre-tax so you save taxes today, but withdrawals are taxed in retirement.

Solo 401k Rollover– An important feature of the Solo 401k plan is the opportunity to consolidate retirement assets into one account via a rollover or transfer. This includes a Traditional IRA, SEP IRA , 401k Plan, Money Purchase Plan, SIMPLE IRA, Profit Sharing Plan, Defined Benefit Plan, 403b Plan and Rollover IRAs. Advantages of rolling over and consolidating your retirement plans into your Solo 401k include improved financial organization and ease of monitoring your retirement portfolio. Also, consolidating retirement accounts is particularly important if you would like to use the Solo 401k loan provision. By rolling over your existing retirement plans you build the balance quickly and then can use its value to receive a larger Solo 401k loan.

Self Employed Retirement Plan Comparison – Compare the Solo 401k, SEP IRA, Defined Benefit Plan and Simple IRA.

Solo 401k Rules & FAQs – Comprehensive questions and answers regarding the Solo 401k.