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Can I Open A Solo 401k

The Solo K Eligibility Requirements

Solo 401k Webinar – Complete “How to” Guide – Open a Self-directed Solo 401k Account at Gemini

Although designed for individuals, a Solo 401k plan is still required to be sponsored by a business to offer benefits to the employees of that business. In the case of a Solo 401k, the sole employee is also the owner .

To address the needs of other individuals who work as independent contractors and freelancers, a Solo 401k can also be set up as long as the person has a self-employed business activity .

What Are The Drawbacks Of A Solo 401

While there are many advantages to a solo 401, there are also drawbacks. The biggest drawback of this plan is that if your business hires an employee, you must include that employee in the 401 plan, and adhere to all IRS testing requirements. This can become cumbersome and more costly for the business but isnt necessarily bad. It is just something to be aware of. You cannot hire an employee and simply exclude them from the 401 and keep it to yourself as the owner.

Another drawback, which is not much of one at all, is that once the plan assets are over $250,000, the plan owner must fill out an IRS form 5500-EZ each year. Again, not much of a hassle, just a little extra paperwork.

Should You Do A Roth Solo 401k

One of the options that’s become important is allowing for a Roth solo 401k. Surprisingly, many brokerage firms currently don’t allow a Roth solo 401k, but it can be a valuable option.

When it comes to your solo 401k, it’s important to remember that you have two aspects of contributions to your plan:

  • You have your elective deferrals, which can either be Roth or Traditional
  • You have your profit sharing contribution, with can only be Traditional
  • Where a Roth option comes in handy is if you’re looking for tax diversification. With Roth contributions, you are using post-tax money. So, you will pay more in taxes today, but you will pay less in the future. However, if you’re putting in large profit sharing contributions into your solo 401k, then it might make sense to make Roth contributions.

    The reason? It will give you tax diversification in retirement. You can choose whether you use taxable or tax free money in the future – and options are always great.

    The important thing to remember here is options. You just want the options to be able to invest how you choose.

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    Solo 401k Rules For Your Self

    Disclaimer: This post may contain affiliate links. Please read my disclosure for more information.

    Solo 401ks also known as individual 401ks have some pretty serious benefits if youre self-employed and want to start saving for retirement. Like any other kind of retirement savings plan, there are solo 401k rules about contribution limits, covering your spouse, tax advantages, etc.

    Lets get straight to the facts and cover the rules about how solo 401ks work and get answers to all of your burning questions about solo 401ks.

    No Employees In Other Businesses

    Grow Control Direct My Solo 401k: Self

    If you have a business that fits the qualification guidelines for Solo 401, you may not be eligible, however, if you or certain family members have ownership in other businesses that do have employees. The IRS defines a Controlled or Affiliated Service Group. If the same 5 or fewer owners have either 80% ownership or more than 50% effective control of one or more businesses, then those businesses are looked at as being one for purposes of plan qualification. If any business within such a group has employees, then all businesses within the group are treated as if they have employees.

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    Solo 401 Vs Sep Ira Contribution Example

    Consider John Smith who, in addition to his regular corporate salary, earns $150,000 of consulting income. The consulting income is earned and paid to his business, John Smith LLC, which files as a sole proprietorship. John wants to save more dollars from this consulting income in a tax-advantaged way. The below compares the total contribution possible with an SEP IRA vs. a Solo 401 plan:

    Best For Real Estate: Rocket Dollar

    Rocket Dollar

    Rocket Dollar allows you to invest in anything you can pay for with a checkbook. That means you can invest in real estate and other non-traditional assets while enjoying the tax advantages of a solo 401 account.

    • Checkbook control allows you to invest in real estate and other alternatives

    • Support for 401 loans and Roth contributions

    • Option for upgraded account that includes free wire transfers, checks, tax form filing, and other features

    • Basic accounts require $15 monthly fee and $360 setup fee

    • Premium accounts require a $30 monthly fee and $600 setup fee

    If you dont want the limitations of traditional financial markets, you may want to consider Rocket Dollar. Instead of stocks, ETFs, mutual funds, and bonds, Rocket Dollar accounts give you the control to buy any asset with your solo 401 that the IRS allows. That can include rental properties, fix-and-flip real estate, or land that you think will appreciate in value. You can invest outside of real estate as well, such as private investments in a startup or precious metals, however, Rocket Dollar’s flexibility makes it the solo 401 that’s best for real estate.

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    Next Steps To Consider

    Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

    The change in the RMD age requirement from 70½ to 72 only applies to individuals who turn 70½ on or after January 1, 2020. Please speak with your tax advisor regarding the impact of this change on future RMDs.

    Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

    This information is intended to be educational and is not tailored to the investment needs of any specific investor.

    Who Can Sponsor A Solo 401k

    Steps to Open a Solo 401k

    To set up a self directed Solo 401k, you must have a self-employment income that can be reported on Schedule C. The form of business whether LLC, corporation, or sole proprietorship doesnt matter, as long as your earned income meets this requirement.

    Dont forget that as the Solo 401k is designed for individuals, you cannot have any full time employee. The only eligible plan participants are you and your spouse, if your spouse is also involved in the business.

    The Solo 401k offers a lot of benefits to those who qualify. As the plan owner, you can contribute up to $59,000 annually as of 2015. There is a wide variety of investment choices to choose from. You will also have checkbook control, ability to contribute into a Roth portion to invest tax-free and have access to the participant loan option.

    To take advantage of these benefits, however, the plan owner must meet all the Solo k eligibility requirements to avoid tax consequences or even the disqualification of the plan. Therefore, review these requirements carefully and consult a professional before setting up your plan.

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    New Oregon Rule Solo 401k

    QUESTION 3: A new Oregon law has gone into effect June 2020 that requires us to provide a retirement plan for even ONE part time employee after just 60 days with the company. Therefore I may have to do a SEP or something like that as well. I was trying to avoid a IRA, SEP or SIMPLE plan in case I want to do a Mega Backdoor Roth in the future. How does this new law effect my Solo401k?

    ANSWER: The new Oregon rule requires offering IRA type accounts to existing W-2 employees, whether they work full-time or part-time.

    Bankruptcy & Creditor Protection For Solo 401k Plan

    QUESTION 4: I am trying to better understand the protections of the solo 401k. I believe it qualifies for unlimited bankruptcy protection, but does it also have unlimited lawsuit protection under ERISA ?


    • Bankruptcy: Solo 401K plans have creditor protection under the federal bankruptcy rules.
    • As far as protection from non bankruptcy creditors, the protection falls at the state level. While solo 401K plans are not covered by the federal creditor protection rules of ERISA, they are generally protected under most state laws subject to certain carve outs .

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    Who Is Eligible For A Solo 401k

    4 days left to open a Solo 401k by the Dec 31st deadline ...

    Lets start with one of the most basic solo 401k rules: eligibility. You are eligible for a solo 401k if you are self-employed and do not have any employees. This applies to self-employed small business owners, freelancers, 1099 contractors, and solopreneurs.

    The most important qualification is that you do not have any employees. However, solo 401ks are unique in that you can cover your spouse if they are drawing income from your business. Your spouse is the only employee that could potentially qualify under your solo 401k plan.

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    What If My Spouse Owns His/her Own Business

    If your spouse owns part of the business, he or she can set up a separate Solo 401k. In most cases, this is not necessary but there can be reasons to make this selection. Your spouse might need different plan documents to ensure IRS compliance, future amendments, restatements, and updates to his or her plan, or have other unique requirements. Your spouse or you might also have legal reasons why a separate Solo 401k plan is preferred.

    A time when a spouse might consider a separate Solo 401k plan is if they have their own sole proprietorship . They have a separate employer identification number and operate the business independent from your business. There can be intermingled business relationships but the businesses are separate entities.

    Prototype Plan Vs Custom Plan

    Once you understand what options you want for your solo 401k plan, it’s time to discuss plan documents.

    See, your solo 401k really has two parts:

  • The Solo 401k Plan Documents – this is what spells out what options your solo 401k offers
  • The brokerage documents/application – this is what your brokerage firm needs to open accounts in the name of the 401k
  • When it comes to the solo 401k plan documents, you can either use a prototype plan, or create your own custom plan.

    A prototype plan is typically offered by the brokerage firms that offer free solo 401k plans. They are called prototype plans because they are very generic plans that were created by a lawyer, and anyone can use them. However, because these are generic plans, they might not offer all of the options you’re looking for in a solo 401k.

    For example, Fidelity’s solo 401k plan doesn’t offer a Roth solo 401k option. Vanguard’s solo 401k plan doesn’t offer loans from your 401k. As such, you need to carefully consider the options available in a prototype solo 401k. E*Trade offers the most robust prototype solo 401k plan.

    On the other hand, you can create a custom solo 401k plan. This is where you pay a company to draft you plan documents that are custom to your needs. The reason you create this is because you want to invest in alternative assets like real estate.

    Other options include:

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    Should My Spouse And I Have Separate Solo 401k Plans

    April 6, 2021 by Editorial Team

    About one out of three Americans is an independent worker or freelancer. This truly is the land of entrepreneurs. Thats a very good reason why the Solo 401k has become such a popular and powerful retirement plan since it first became available in 2001 when the U.S. Congress passed the Economic Growth and Tax Relief Reconciliation Act .

    The Internal Revenue Service refers to this entrepreneurs retirement plan as a one-participant 401k plan. However, it is commonly known as a Solo 401k along with other names such as uni-k, self-employed k, and self-directed 401k. The common theme among all of these names is the implication that only one person can be a participant in the plan. But that can be misleading. The one-employee rule doesnt apply to the spouse of the business owner. Your spouse can work at your sole proprietorship and invest through your Solo 401k plan.

    Best For Low Fees: Charles Schwab

    Can I Open A Solo 401(k) And Roll My SEP IRA Into The 401(k) To Do A Backdoor Roth IRA? YQA 213-2

    Charles Schwab

    The Individual 401 Plan from Charles Schwab is our top choice for low fees. The account has no opening or maintenance fees as well as no commission trades for stocks or ETFs and over 4,000 no-load, no-transaction-fee mutual funds. Customers can also use its robo-advisor, Schwab Intelligent Portfolios, with no extra fees.

    • Accounts are free to open and charge no recurring fees

    • Access to trade stocks, ETFs, and thousands of mutual funds for free

    • Option for a no-cost robo-advisor

    • No solo 401 loans

    • High fees for some mutual fund trades and broker-assisted trades

    Charles Schwab is our top choice for low fees in a solo 401 plan. Schwabs version charges no recurring fees and no setup fees. It offers commission-free trades for all stocks and ETFs as well as over 4,200 no-transaction-fee funds on the Schwab OneSource funds list. While Schwab offers excellent customer service, be aware that automated phone trades cost $5 and broker-assisted trades cost $25 each. However, many customers could use this account without paying any fees.

    Schwabs Solo 401 doesnt offer 401 loans. Its active investment platform may not satiate all expert investors, and its active charting and analysis tools lag behind some other brokerage platforms for active traders. However, the pending integration of TD Ameritrade will bring the coveted thinkorswim® platform under the Schwab umbrella, which is something active traders at Schwab can look forward to.

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    Limited Liability Company Or Partnership

    There are 3 ways an LLC may be treated, depending on your structure:

  • Partnership If an LLC has 2 members , it is classified as a partnership for federal tax purposes. Each spouse in the Solo 401k is responsible for their income, profit and loss, as shown on a K-1
  • Corporation If an LLC is classified as a Corporation, it will file Form 8832. The Corporation files tax form 1120. There are no flow through items to a 1040. Each spouse/member receives a K-1 to document income, profits, loss, etc.
  • Disregarded entity If an LLC only has one member, it is a disregarded entity. Youll report business activity on your tax form1040, typically on Schedule C. For a participating spouse, the member of the LLC would pay the spouse a W-2 so the spouse is eligible to participate in the Solo 401k.
  • Final Thoughts On Solo 401 Benefits

    If you’re feeling like you haven’t arrived yet with your 1099 income, remember that you don’t have to make huge contributions to start a Solo 401. Savings and retirement are all about options. Giving yourself access to another way to save for the future is priceless.

    Read on for the second part of this topic where I’ll discuss why you should choose a solo-K over a SEP-IRA and where you should open your Solo-K.

    *2019 limits. If you are age 50+, you can add another $6k to your employee contributions.

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    What Paperwork You Need To Fill Out To Open Your Account

    I was surprised at how much paperwork is required to open a solo 401k account. You’d think it would be simple, with very common forms to fill out. However, it’s completely the opposite. It becomes even more challenging if you add a Roth solo 401k, and you have to do double the paperwork if you’re adding a spouse to your plan.

    When opening your solo 401k plan, you will need to create the following documents. You will need to create separate plan documents for both your Traditional and Roth Solo 401ks. They are both considered separate plans for tax purposes.

    Plan Documents For Traditional Solo 401k

    • 401k Plan Adoption Agreement
    • Designation of Successor Plan Administrator

    Plan Documents For Roth Solo 401k

    • 401k Plan Adoption Agreement
    • Designation of Successor Plan Administrator

    Required Documents For Individual

    • Brokerage Account Application for 401k Account
    • Brokerage Account Application for Roth 401k Account
    • Designation of Beneficiary Form for Account
    • Power of Attorney

    Required Documents For Spouse

    • Brokerage Account Application for 401k Account
    • Brokerage Account Application for Roth 401k Account
    • Designation of Beneficiary Form for Account
    • Power of Attorney

    When you’re done with all these documents, you’ll have two solo 401k plans, and 4 accounts .

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