Many self-employed individuals use solo 401(k) plans to save for retirement. This plan offers higher contribution limits, which can lead to huge tax-deferred savings and earning potential. And, when you self-direct the plan, you get the additional bonus of investing in alternative assets to build the retirement wealth you desire. A solo 401(k) with Advanta IRA provides big benefits you should know.
Advanta IRA has two ways to solo 401(k)—a do your own model and a full-service model—designed to fit the level of control you want over your retirement funds.
We also allow two Roth IRA strategies within our solo 401(k) plans that give you the ability to maximize your contributions and capture tax-free income in the account.
Why Use a Solo 401(k)?
Also known as an individual 401(k) or a solo-k, this plan delivers a cost-effective, easy way to invest and save for retirement. The contribution limits are much higher than IRA contributions.
And you’re able to contribute to your plan as both an employer and an employee.
If you are self-employed and/or own a small business with no employees other than your spouse and/or partner, the solo 401(k) may be your perfect retirement plan. If you’re an entrepreneur who expects an influx of income in the coming years, you should consider using a solo 401(k) to capitalize on this plan’s contribution aspects.
For 2021, the total employee and employer annual contribution limit is $58,000, or $64,500 if you’re age 50 and over. That’s quite a bit of cash you can sock away every year for retirement. It’s also quite a bit of capital to reinvest. And, if you choose to self-direct, your solo (k) becomes even more powerful.
A self-directed solo(k) gives you control over the investing decisions in your plan.
Instead of relying on a bank or brokerage to invest your funds into the limited assets they sell, self-directed accounts allow you to invest in a wide variety of alternative assets to build wealth in your plan. You’re not limited to stocks, bonds, or mutual funds. You can invest in real estate, private equity, Bitcoin, and many other assets besides the stock market.
2 Strategies to Capture Roth Benefits in a Solo 401(k)
In addition to the pre-tax benefit of solo 401(k) contributions, there are two ways to achieve tax-free growth on earnings in the account. Solo-k plans that allow Roth 401(k) and mega Roth components provide the opportunity to grow tax-free income in the plan (like in a Roth IRA)—even if you don’t meet the income requirements to open a Roth IRA.
Advanta IRA allows both Roth strategies within the solo 401(k) plans we serve.
It is important to note that not all administrators permit these Roth IRA strategies within their solo 401(k) plans. However, Advanta IRA does allow them. Below are the basics on how the Roth and mega Roth components work in our solo 401(k)s.
First, the Roth 401(k) component in a solo-k allows employees to make post-tax contributions, just like with a Roth IRA. And, just like a Roth IRA, the earnings of these contributions grow tax free and are not taxed in retirement when you take distributions. Additionally, this Roth component in your solo 401(k) allows you to convert employer contributions to a Roth designation in the plan. Often, 401(k) plans with this feature are called Roth 401(k)s.
- There are no income limits to make Roth contributions to your Advanta IRA 401(k) like there are for a Roth IRA.
- In 2021, you can make employee Roth contributions of up to $19,500 (or up to $26,000 if you are 50 or older).
- Employer contributions are always pre-tax but can be converted to the Roth component.
- Distributions of earnings are tax free if you are 59 ½ years or older and have owned your Roth solo(k) for 5 years.
- You can implement the mega Roth strategy to further maximize contributions.
Second, the mega Roth strategy works in tandem with the Roth component in your solo 401(k) with Advanta IRA. If your employee plus employer contributions don’t reach the annual limit, you can make an employee after-tax, non-Roth (mega Roth) contribution of the difference and immediately perform an in-plan Roth conversion to capture tax-free growth on those funds.
Requirements for mega Roth strategy:
- Your solo 401(k) must allow in-service rollovers.
- Your solo 401(k) must have the Roth IRA component that permits mega Roth contributions.
- If you do not immediately perform an in-plan Roth conversion of your mega-Roth contribution, the income generated from that contribution will grow tax deferred instead of tax free.
2 Ways to Solo 401(k) with Advanta IRA
There are two ways to use a solo 401(k) with Advanta IRA. These plan models are designed to meet the needs of those who prefer a more hands-on approach and for those who don’t have time to manage the finer details of their accounts.
For both models, Advanta IRA provides plan documents approved by the IRS, and we update your plan documents to ensure compliance with the IRS. If you choose our do-your-own plan, you’ll have a bit more responsibility, but you also have the flexibility of checkbook control. Below are the basic features of each model structure and the basics of how they work.
1. Do Your Own Solo 401(k) with Checkbook Control
- As the plan owner, you are the trustee of the plan.
- Checkbook control is automatic with this plan.
- You choose the bank where uninvested cash from your 401(k) is deposited in an account opened in its name.
- You must ensure investments are titled properly, execute all investment documents, and pay for the asset from funds held in the 401(k)’s bank account.
- You deposit all income from the investment into the bank account and pay any bills related to the asset from the bank account.
- You are responsible for all IRS reporting.
2. Full-Service 401(k) Plan Model
- You act as trustee of the plan.
- Advanta IRA makes sure investments are titled properly, and you execute the investment documents. At your direction, we release funds from your account to make the investment purchase.
- Advanta IRA receives and deposits investment income, and upon your instruction, we pay any bills the investment generates.
- You are responsible for accurate reports for the IRS.
- You can get checkbook control with this plan by opening a separate entity like an LLC or a trust.
- Uninvested funds are held in Advanta IRA’s trust account.
While Advanta IRA is the administrator over both models, the model you choose depends on the amount of time you want (or have) to spend managing other details (paying bills, receiving income and depositing it into the account, ensuring proper investment titling, etc.). Additionally, with checkbook control accounts, you are responsible for required record keeping and reporting for the LLC.
Why Open a solo 401(k) with Advanta IRA?
We believe you maximize your investing potential when you capitalize on your own knowledge and expertise.
As an elite provider of self-directed retirement and savings plans, Advanta IRA is perfectly poised to help you do exactly that. We offer the one-on-one service you deserve when investing your hard-earned wealth to secure financial freedom in retirement. Unlike many other self-directed IRA custodians, Advanta IRA provides you a single, dedicated account manager to assist you throughout each investment process. This concierge-style level of service is equally professional and personal, and it has served our clients well for nearly two decades.
For more information about a solo 401(k) with Advanta IRA, self-directed retirement plans, and alternative investments, please contact us today.