The Self-Directed Solo 401(k) for Small Business Owners

You don’t have to work for a big company to have a 401(k). Small business owners and self-employed individuals can open and contribute to an individual 401(k) and enjoy the same retirement-saving benefits that the traditional corporate plan offers. A self-directed solo 401(k) has the same features as the individual 401(k), but give you the unique and powerful ability to invest in alternative assets, like real estate, private lending, private equity, and more.

A solo 401(k) allows you to make both employee and employer contributions for yourself, which almost triples your contribution amount. 

A self-directed solo 401(k) is governed by the same rules and has the samePretty blonde female business owner at desk talking on the phone and smiling. benefits as a typical 401(k). But a self-directed solo 401(k) gives you the freedom and flexibility to make your own investment choices. You are in control of your retirement funds and investing decisions. You can use alternative investments to the stock market to build wealth in the account, and you’re not limited to assets chosen or sold by the plan custodian.

Before you can decide if a self-directed solo 401(k) is the right plan for you, you should understand all of aspects of a solo 401(k). When these benefits are combined with the advantages of self-direction, we believe you’ll easily see the power that a self-directed plan provides.

A Self-Directed Individual 401(k) Has the Same Benefits as an Individual 401(k)

Eligibility

Also called a solo 401(k) or solo-k, individual 401(k) plans are much easier to manage and not as costly as the traditional plans sponsored by larger businesses. The solo-k was specifically designed for small businesses, partnerships, and sole proprietors. To qualify, your business can’t have any full-time employees other than you and your spouse, or a partner and their spouse. However, if you have employees under the age of 21 or do not work more than 1000 hours a year or 500 hours/year for three consecutive years, your business can still utilize a solo-k.

One of the most attractive benefits of a solo 401(k) is that your annual contribution limit is much higher than a traditional or Roth IRA.

Contributions

As a business owner, you’re considered an employer and an employee. This means you can make pre-tax employee contributions to your solo-k as well as matching employer contributions to your plan. This helps you maximize the amount of money you can save for retirement.

  • Employee contributions are made through pre-tax salary deferrals.
  • Employer contributions to your solo-k are pre-tax and can total up to 25 percent of your employee compensation (as defined by the plan).
  • Employer contributions are tax-deductible for your business.
  • There are Roth and mega Roth options that offer tax-free income on earnings and a way to increase your contributions to the plan.

Download our free eBook, Invest for Success: What Is a Solo 401(k)? for detailed information on the Roth and mega Roth options in a solo-k.

Along with the basic benefits, you also gain these advantages:

  • You can borrow up to 50 percent of the account balance (for a maximum of up to $50,000).
  • Contributions can be cash or property as long as the contribution’s value isn’t more than the annual limit.
  • “C” corporations can contribute cash, property, or corporate stock and take deductions on those contributions as long as the transaction falls within IRA guidelines.
  • In some circumstances, solo-k plan owners can lease property owned by the plan.
  • Trustees of these plans can be the business owner(s) and/or spouse(s).
  • Trustees can manage the plans using checkbook control.

Annual contribution limits

As an employee for tax years 2020-2021, you can contribute an annual salary deferral of up to $19,500. An additional $6,500 catch-up contribution is allowed for those over 50 years of age.

Keep in mind that the total employee and employer contributions must not exceed $57,000 per person for 2020 ($63,500 if you’re over 50) or $58,000 for 2021 ($64,500 if you’re over 50).

Additional Advantages You Get with a Self-Directed Solo 401(k)

  • You choose the investments for your self-directed solo 401(k)—not the plan custodian or an investment broker.
  • You can invest in alternative assets such as real estate (multifamily property, rentals, tax liens/deeds), precious metals, cryptocurrency, startups, and many other nontraditional assets.
  • Investing in alternatives to the stock market takes you off that roller coaster by providing the potential to offset the market’s ups and downs.
  • When you can invest in things you know and understand, you increase your potential for successfully building the retirement wealth you desire.

Final Thoughts

If you’re a small business owner—even if you own a side business—you can use a self-directed solo 401(k) to maximize your retirement savings. It is a good idea to discuss the pros and cons with your financial advisor or tax professional. The benefits are tremendous if your business falls within the requirements, but owning and operating any retirement plan outside the realm of IRS rules can have disastrous results.

About Scott Maurer

Scott is an attorney and a graduate of the University of Florida Law School. Scott started his career with Advanta IRA in 2006. His experience with various investment types and their unique processes makes him an invaluable asset. Scott holds the designation of Certified IRA Services Professional (CISP) and leads engaging seminars and webinars that educate the public on the intricacies of self-directed IRAs.