Self-Directed Individual 401(k)
An individual 401(k), also called a solo 401(k), is specifically geared for the self-employed and/or small business owners who do not have full-time employees (except themselves, their partners, or their spouses). This plan allows a business owner to defer a portion of their salary into the account as well as have the business make a matching contribution.
Many people choose a self-directed individual 401(k) so they can control their funds and choose their own investments in the plan. When you self-direct, you can use alternative assets to build wealth for retirement. And, there is an incredibly large pool of options besides stocks, bonds, and mutual funds you can choose for this purpose.
What Makes the Solo 401(k) so Powerful?
- Higher contribution limits than traditional or Roth IRAs
- Employer profit-sharing match is a tax-deferred contribution (and a deduction for the business)
- Ability to borrow personally from the plan
- A self-directed individual 401(k) can purchase leveraged real estate and avoid unrelated business income tax (UBIT)
- Choose your own investments including real estate and private placements
- Option to have checkbook control over the funds
Roth 401(k) Option
- Provides tax-free income on earnings
- Contributions are not subject to the income limitations of a Roth IRA
- Roth and non-Roth contributions can be commingled—no other account type allows this
- You can immediately convert employer contributions to Roth designation within your plan
Mega Roth Option
- Maximize your total contribution of $58,000 ($64,500 if you are 50 or older) with employer + employee +mega Roth contributions*
- Mega Roth contributions are made after-tax and need to be immediately converted to Roth component within the plan to grow tax free
- If the sum of your employer and employee contributions is less than the annual limit set by the IRS, the mega Roth component allows you to make up the difference
*based on 2021 contribution limits
- Businesses that are corporations, partnerships, LLCs, or sole proprietorships and who do not have any employees other than partners or their spouse
- Employee must have received earned income during the year
- If the only employees of the business are under the age of 21 or do not work more than 1,000 hours/year, then the business owner can still use this plan
- Distributions made from the tax-deferred portion of the plan are considered annual income and are subject to income tax
- But, distributions from the Roth portion are treated under the same distribution rules as a Roth IRA
If you are under the age of 59 ½, there is a 10-percent early-withdrawal penalty, in addition to the income tax that may be due. However, if you inherited the IRA or are disabled, there are exceptions to the withdrawal penalty. For more information, including additional exceptions, please contact your tax professional.
Invest for Success:
What is a Solo 401(k)?
Advanta IRA offers individual 401(k) options
- Manage Your Own Plan: Allows you, as the trustee of your plan, a lot of freedom and flexibility. You execute every investment document and handle all bills and deposits. You establish a bank account in the name of your plan and perform all record keeping and custodial responsibilities. Advanta IRA provides an IRS-approved plan document.
- Full-Service Model: Advanta IRA handles all recordkeeping duties, bills, and deposits, and provides the IRS-approved plan document.
Contribution Limits of a Self-Directed Individual 401(k)
|401(k) Profit-Sharing Plan||2020||2021|
|Employee Elective Salary Deferrals||$19,500||$19,500|
|Salary Deferral Catch-Up Contribution (age 50 and older)||$6,500||$6,500|
|Employer Profit-Sharing Contribution||Up to 25% of salary of self-employed earnings||Up to 25% of salary of self-employed earnings|