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.
We offer three ways to solo 401(k) with Advanta IRA—a do your own model, a full-service model, and an enhanced recordkeeping and reporting plan—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), a QRP, or a solo-k, this plan delivers a cost-effective, easy way to invest and save for retirement. The solo 401(k) contribution limits are much higher than IRA contributions.
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. You can even use this plan if you own a side business.
And you’re able to contribute to this plan as both an employer and an employee.
For 2022, the total employee and employer annual contribution limit is $61,000, or $67,500 if you’re age 50 and over. That’s quite a bit of cash you can sock away every year for retirement and potentially get large tax deductions for the contributions you make. This means you achieve 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, cryptocurrency, and many other assets besides the stock market.
How Do Roth Components Work 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 401(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. Below are the basics on how the Roth and mega Roth components work in Advanta IRA’s solo 401(k)s.
Roth 401(k) component
This allows employees to make post-tax contributions of their salary into the solo 401(k) plan. 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 pre-tax employer contributions to a Roth component 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 solo 401(k) like there are for a Roth IRA.
- In 2022, you can make employee Roth contributions of up to $20,500 (or up to $27,000 if you are 50 or older).
- Employer contributions are always pre-tax but can be converted to the Roth component.
- Distributions of earnings of the Roth component are tax free if you are 59 ½ years or older and have owned your Roth solo(k) for 5 years.
Mega Roth strategy
This 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-plan Roth conversions.
- Your plan 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.
3 Ways to Solo 401(k) with Advanta IRA
There are three 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 each model, Advanta IRA provides plan documents approved by the IRS, and we update your plan documents to ensure compliance with the IRS.
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 as you will establish a bank account in the name of your solo 401(k) plan.
- You choose the bank where uninvested cash from your 401(k) is deposited. (Advanta IRA can provide you with a few names of banks familiar with this set up.)
- You must ensure investments are titled properly, execute all investment documents as trustee, 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.
- If your solo 401(k) has a Roth component, as trustee you must separately track Roth and pre-tax funds. We recommend individual bank accounts for each of those funds for your ease.
- You are responsible for all IRS reporting, including record keeping and tax filings for the plan.
2. Standard 401(k) Recordkeeping 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 all annual reporting reporting (1099-R, 5500EZ, etc.) to the IRS.
- You can get checkbook control with this plan by opening a separate entity like an LLC or a trust, in which case, you will be responsible for the recordkeeping of that entity.
- Uninvested funds are held in Advanta IRA’s trust account.
3. Enhanced Solo 401(k) Recordkeeping an Reporting Plan
- You are the trustee of this plan.
- Advanta IRA reviews investment documents for accuracy, ensuring investments are titled properly. As trustee, you execute all investment documents and request Advanta IRA release funds from your solo 401(k) to .
- Advanta IRA receives investment income and deposits it into your account. At your direction, we pay bills incurred by the asset from the account.
- Advanta IRA prepares all annual tax filings, including but not limited to IRS forms 1099-R and 5500EZ.
- If you want checkbook control of plan funds, you must open a separate entity like an LLC or a trust, but you are responsible for the record keeping and reporting for this LLC entity.
- If you have a Roth component, Advanta IRA opens separate accounts for the pre-tax and Roth contributions. We also track those contributions, transfers, and earnings.
- Uninvested funds are held in Advanta IRA’s trust account.
While Advanta IRA is the plan provider for each of these three models, the type you choose depends on the amount of time you want (or have) to spend managing the details of paying bills, receiving and depositing income into the account, ensuring proper investment titling, and handling IRS reporting duties.
Why Open a Solo 401(k) with Advanta IRA?
We believe you 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.
Additional resources about retirement investments:
Solo 401(k)s, SEP and SIMPLE IRAs: Retirement Plans for Small Business Owners
The Basics of IRA Tax Benefits
What are Stock Market Alternatives for IRAs and Other Investors in 2022?