Comprehensive Guide to Solo 401(k) Retirement Plans
Explore the essentials of Solo 401(k) plans tailored for self-employed entrepreneurs. Learn about eligibility, contribution limits, plan types, and tax benefits, designed for small business owners without full-time employees seeking flexible retirement savings options.
Understanding the Solo 401(k) Retirement Account
The Solo 401(k), also known as an individual 401(k), is a retirement savings plan tailored for self-employed individuals and small business owners without full-time employees. It allows participants to contribute pre-tax income, deferring taxes until retirement. Both the business owner and spouse can contribute, providing higher contribution limits compared to traditional plans. This plan offers significant tax advantages and flexibility, especially for solo entrepreneurs, freelancers, and partners in small enterprises.
Designed specifically for businesses without full-time employees, the Solo 401(k) enables contributions from the owner or self-employed individual. It is also called a Self-Employed 401(k) or Single-Participant 401(k). Participants can make profit-sharing contributions similar to traditional 401(k) plans, with higher caps available for those over 50 years old. The plan offers options for various business types, including sole proprietorships, partnerships, LLCs, and S-corporations.
Eligibility Criteria for Solo 401(k):
Must have self-employed income from a part-time or full-time business.
Available to sole owners, partners, and shareholders holding at least a 5% stake in the business.
The business should not employ full-time employees eligible for the plan, excluding minors, expats, or union members with specified benefit plans. Only owners, partners, and their spouses qualify.
Types of Solo 401(k) Plans:
Plans can be customized based on the governing documents and operational agreements. Providers, known as plan sponsors, offer either pre-designed or customized plans depending on the investor’s goals and control preferences. Two common types are:
Brokerage-Based Solo 401(k): Limited investment options focused on stocks and mutual funds; no loan facilities available.
Self-Directed Solo 401(k): Broader investment choices, including real estate, private equity, precious metals, and more, but excluding collectibles. It also supports conversions from traditional to Roth accounts.
