Is a Solo 401k Right for Me?

A Solo 401k has many names such as One-Participant 401, Solo-k, Uni-k, or One-Participant k. The IRS created this retirement account with small business owners in mind. Below are some frequently asked questions that will help you determine if this plan is right for you. 

What is a Solo 401k?

A Solo 401k plan is a Qualified Retirement Plan (QRP) designed for small business owners who traditionally do not have the benefits of an employer-sponsored 401k. Business structures include a sole proprietorship, LLC, C-Corps, and S-Corp.

 

Who is eligible?

Self-employed individuals. In additional, their spouse (if in the business), and/or their business partners. There cannot be any full-time W-2 employees.

 

What is the difference between a Solo 401k and a Self Directed SEP IRA?

A Solo 401k allows for larger contributions, just like a SEP IRA, but there are a couple added benefits such as taking out a loan. Please see our SEP IRA vs Solo 401k Guide for more details. In other words, both plans allow for large contributions and alternative investing.

 

How much can I contribute to a Solo 401k?

The maximum contribution limit is $57,000 ($63,500 if 50 or older). Most importantly, please have your CPA assist in determining your eligible contribution as it is also based on your net self-employment income.

 

What investments can I make with a Solo 401k?

You can invest in a wide variety of alternative assets with the IRA Club. For instance, real estate, private lending, life settlements, any many more. Solo 401ks can make the same investments that a Self Directed IRA can make. Therefore, a Solo 401k is a great option for alternative investing. 

 

Will I have my own checking account?

All accounts are administered by IRA Club. By default, we would send any checks/wires for investments and expenses. In additional, IRA Club will do all the bookkeeping for the investments. We have a portal where you may view the transactions and statements. 

 

What is the process?

  1. Complete the Solo 401k application. Please also include a copy of your ID for verification.
  2. Sign the adoption agreement once your new Solo 401k is ready. IRA Club will email you a copy.
  3. You can easily rollover funds from an existing 401k, 403b, or TSP. Funds from an IRA are considered a “reverse rollover”. You can complete that custodian’s distribution form, and then you will re-deposit the funds into your Solo 401k. You will have 60 days from the distribution to do this without any penalties. Please note that when done correctly, there will be no taxable amount.
  4. Congratulations, you are now ready to invest using your new Solo 401k. Please complete our investment directions and provide the necessary supporting documents. Feel free to contact our investment team if you have any questions or need any help along the way.

 

How do I fund the Solo 401k?

Contributions are split into two categories.

Employee Contribution

  • Not to exceed the lesser of 100% of earnings or $19,500 annually
  • A catch-up contribution of $6,500 is allowed if you are 50 or older
  • May be pre-tax (similar to a Traditional IRA) or post-tax (similar to a Roth IRA)  
  • Contribution deadline is December 31st of that year 

Employer Contribution (also called profit sharing) 

  • May be up to $57,000 or $63,500 (including the employee contribution)
  • Must be pre-tax (similar to a Traditional IRA)  
  • The contribution deadline depends on the type of entity for the business

Total Contribution for 2020 

  • The employee and employer contribution cannot exceed $57,000 ($63,500 with catch-up contribution)

 

Transferring from another retirement account to the Solo 401k

  • Only pre-tax is allowed for IRAs
  • Pre-tax or post-tax is allowed for existing 401k plans
  • Please note: separate accounting must be maintained for different tax types

 

How can I start a Solo 401k?

If you are ready to open a Solo 401k, simply submit the Solo 401k Application to newaccounts@iraclub.org

 

What is the cost?

Please review the 401k Fee Schedule

 

In conclusion

The IRS has provided small business owners with multiple options. Choose the plan that is right for both your business and retirement goals. IRA Club is here to answer any questions.

 

For information about the Self Directed IRA or Solo 401(k), call IRA Club at 312-795-0988

IRA Club offers no investments, products, or planning services. Therefore, please consult your attorney, tax professional, financial planner, and any other qualified person before making any investments.