Self-Directed Solo 401(k)
A solo 401(k), also called an individual 401(k) or solo-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 both employer and employee contributions: you can defer a portion of your salary into the account and have the business make a matching contribution into your plan.
Many people use a self-directed solo 401(k) so they can control their funds and choose their own investments for the plan. When you self-direct, you can use alternative assets to save for retirement—and you choose exactly what assets you want to invest in with your plan. There is a large pool of options besides stocks, bonds, and mutual funds you can choose for this purpose.
What Makes the Self-Directed Solo 401(k) so Powerful?
Self-directed solo 401(k) plans offer all the benefits of a solo 401(k) plus the ability to:
- Choose your own investments
- Use alternative assets to build tax-advantaged retirement wealth
- Purchase leveraged real estate and avoid unrelated business income tax (UBIT)
- Have checkbook control of the funds in the account to make investments
Advantages of a Solo 401(k)
These retirement plans offer many benefits for account owners:
- You can make contributions as an employer and as an employee
- Pre-tax savings and higher contribution limits than traditional or Roth IRAs
- Roth and mega Roth options that allow you to maximize your employee contributions
- Employer contributions are tax-deferred and a deduction for the business.
- Ability to borrow personally from the plan—up to 50 percent of the account balance (for a maximum of up to $50,000)
- Trustees can be the business owner(s) and/or spouse(s) and can manage these accounts using checkbook control
- “C” corporations can contribute cash, property, or corporate stock and take deductions on those contributions within the limits set forth by the IRS
- Account owners may be able to lease property owned by these accounts
Features of the Roth 401(k) Option
- The Roth 401(k) option provides tax-free income on earnings in the account.
- You can make after-tax employee contributions.
- Contributions are not subject to the income limitations of a Roth IRA.
- Roth and non-Roth contributions can be commingled within the same account—no other account type allows this.
- You can immediately convert employer contributions to a Roth designation within your plan.
Features of the Mega Roth Option
- You can maximize your total annual contributions by making employer + employee + mega Roth contributions.
- Mega Roth contributions are made after-tax and must be immediately converted to the 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 in contributions for that tax year.
Who Qualifies for an Individual 401(k)?
- Businesses that are corporations, partnerships, LLCs, or sole proprietorships (such as self-employed individuals) and who do not have any full-time employees other than partners or their spouse.
- To qualify for employer contributions, as an employee you must have received taxable earned income during the year.
- If the only employees (other than the owners) of the business are under the age of 21 or do not work more than 1,000 hours/year (or 500 hours/year for a consecutive three-year period), the business owner can still use this plan.
Do you have a side business?
If you have a side business apart from your regular job, you can use an individual 401(k) even if you have a 401(k) through your employer. A solo-k sponsored by your side business can help you max out your overall 401(k) annual contributions if you and your employer are not contributing the full amount allowed to your employer-sponsored plan.
SECURE Act 2.0 Changes for Sole Proprietors
Sole proprietors and single member LLCs were given special provisions in Section 317 of the SECURE Act 2.0—retroactive first-year elective deferrals. These employers are able to establish new solo 401(k)s after the end of the taxable year—and make contributions to count towards that taxable year—as long as the plan is established before the employer’s tax-filing date. This allowed for employer contributions to be made to the plan up until the day the employer filed their taxes. But employee contributions weren’t allowed after December 31 of the tax-filing year. Per section 317, sole proprietors and single member LLCs who establish solo 401(k)s in this manner can now receive employee contributions to the plan up to the date of the employee’s tax-filing date. This provision only applies to the initial year the new 401(k) is established and is effective for plan years that occur after the date of the enactment of the SECURE Act 2.0.
Advanta IRA Offers Three Solo 401(k) Options
| Do Your Own Plan (Checkbook Control) | Standard 401(K) Recordkeeping Plan | Enhanced 401(K) Recordkeeping & Reporting Plan | |
|---|---|---|---|
| IRS approved plan documents | Provided by Advanta IRA. | Provided by Advanta IRA. | Provided by Advanta IRA. |
| Required updates to plan documents | Advanta IRA updates plan documents and ensures IRS compliance at no additional cost to you. | Advanta IRA updates plan documents and ensures IRS compliance at no additional cost to you. | Advanta IRA updates plan documents and ensures IRS compliance at no additional cost to you. |
| Who acts as plan trustee? | You do as plan owner. | You do as plan owner. | You do as plan owner. |
| Where is the uninvested cash held? | It is held at a bank of your choice in an account you open in the name of your 401(k). | It is held in Advanta IRA’s trust account. | It is held in Advanta IRA’s trust account. |
| How are new investments processed? | You ensure proper titling of investment paperwork. You execute all investment documents. You release funds from your 401(k) bank account. | Advanta IRA ensures proper titling of investment paperwork. You execute all investment documents. Advanta IRA releases funds. | Advanta IRA ensures proper titling of investment paperwork. You execute all investment documents. Advanta IRA releases funds. |
| Who performs recordkeeping functions? | You deposit investment income into and pay bills from the plan’s bank account. | Advanta IRA deposits all investment income into your plan and pays bills from it at your direction. |
Advanta IRA deposits all investment income into your plan and pays bills from it at your direction. |
| Who files appropriate tax forms? | You are responsible for all IRS reporting. | You are responsible for all IRS reporting. | Advanta IRA prepares all annual tax filings, including forms 1099-R and 5500EZ. |
| How do I get checkbook control over my account? | Checkbook control is automatic with this option. | A separate entity like a trust or LLC is needed. | A separate entity like a trust or LLC is needed. |
| How do I track separate pre-tax and Roth contributions, transfers, and earnings? | As trustee, you are responsible for tracking separate pre-tax and Roth funds. Advanta IRA suggests setting up separate bank accounts for those funds. | As trustee, you are responsible for tracking separate pre-tax and Roth funds. The pre-tax and Roth funds will be comingled into one Advanta IRA account. | Advanta IRA establishes separate accounts for the pre-tax and Roth portions of your plan and tracks the contributions, transfers, and earnings. |
Which Small Business Plan is Right for You?
Download our Chart to Compare the Features & Benefits of Solo 401(k), SEP, & SIMPLE Plans
Why Work with Advanta IRA?
Advanta IRA leads our industry with nearly two decades of experience and nearly $2 billion in client assets under management. We provide world-class service with a personal touch that you won’t find anywhere else. You work with a dedicated account manager who assists you with all of your needs and ensures your account records comply with IRS regulations. Contact us for more information or to open your solo 401(k) today.
CONTRIBUTION LIMITS
| Solo 401(k) Profit-Sharing Plan | 2022 | 2023 |
|---|---|---|
| Employee Elective Salary Deferrals | $20,500 | $22,500 |
| Salary Deferral Catch-Up Contribution (age 50 and older) | $6,500 | $7,500 |
| Employer Profit-Sharing Contribution | Up to 25% of salary of self-employed earnings | Up to 25% of salary of self-employed earnings |
| Total Combined Contribution: Salary deferral plus profit-sharing match (under age 50) | $61,000 | $66,000 |
| Total Combined Contribution: Salary deferral plus-profit sharing match (age 50 or older) | $67,500 | $73,500 |
Deadline to Open a Solo 401(k)
You have until the last day of your business’s income tax reporting year, including extensions, to open a solo-k. Depending on how your business is set up, it may benefit you to establish your plan early in the year as you can to take advantage of employee salary deferrals.
Distributions from Solo-K Plans
- Distributions made from the tax-deferred portion of the plan are considered annual income and are subject to income tax.
- Withdrawals 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 as well as 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.
