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Solo 401(k) Retirement Plan

How the Solo 401(k) Works

The Solo 401(k) is a self-directed retirement plan that’s like the traditional 401(k) but designed for one employee. Being a term of art, you won’t find the term “Solo” in the Internal Revenue Code (IRC). Essentially, a Solo 401(k) means a 401(k)-retirement plan that isn’t subject to ERISA rules, a body of laws that was enacted to protect the interest of employees in the work industry. This is because the Solo 401(k) is designed for one employee.

In 2001, EGTRRA (Economic Growth Tax Relief Reconciliation Act) was signed into law, which added many attractive features to the Solo 401(k) plan, such as the employee deferral and loan feature. This launched the Solo 401(k) as the preferred retirement plan among small business owners and self-employed individuals. Prior to EGTRRA, business owners generally established a SEP IRA, a profit-sharing plan that had more advantages than the Solo 401(k). To learn more about the difference between both plans, read Why Choose a Solo 401(k) vs. SEP IRA Plan.

Eligibility Requirements for a Solo 401(k)

You must meet only two eligibility requirements If you want to establish a Solo 401(k) and gain the benefits the plan has to offer.

Features include:

  • Higher maximum contributions
  • Borrow a five-year loan tax and penalty-free
  • Contributions to the Solo 401(k) plan are in pre-tax or after-tax
  • Make traditional and alternative asset investments

To take advantage of the plan, there are only two eligibility requirements you must meet.

  1. Self-employment: You must be self-employed as a sole proprietorship, single member LLC, partnership, C corporation or S corporation.
  2. No full-time employees: You cannot have full-time employees, except for a spouse or business partner(s).

It is believed that the IRS will consider you eligible for a Solo 401(k) if the business being conducted is a legitimate business that is run for the benefit of generating a profit.

Solo 401(k) Employee & Employer Contributions

The high contribution limits are the primary benefits of establishing a Solo 401(k) retirement plan. The maximum contributions for 2019 are $56,000 if you’re under 50 and $62,000 if you’re over 50. These are the maximum contributions, which you are not required to make. However, you cannot exceed the maximum contributions of a Solo 401(k).

When broken down, the Solo 401(k) contributions have two components.

Elective Deferral

First, there is the elective deferral which is the contribution you make as the employee. You can contribute $19,000 dollar for dollar (under 50) or $25,000 (over 50). You can make the contribution in pre-tax, Roth or after-tax.

Profit-Sharing

The second type of contribution for a Solo 401(k) is the employer contribution, which is a percentage of your self-employment income or your schedule C if you’re a single member LLC or sole proprietor. This percentage is 20%.

If you’re a C corp., S corp., or W-2, the contribution is 25% of your compensation.

It’s important to note, you cannot defer more than you make. Therefore, if you only make $10,000, this is the highest amount you can defer.

Thanks to EGTRRA, the Solo 401(k) maximum contribution makes it the most popular individual retirement plan for small business owners and the self-employed. You can combine your employee deferral with your profit-sharing contribution and produce the highest maximum contribution limits.

4 Steps to Establish a Solo 401(k) Plan

  1. Open an Account: You need to open an account with a custodian that allows for non-traditional investments, like IRA Financial Trust.
  2. IRA Financial Mobile App: Establish your Solo 401(k) plan in just minutes using the free IRA Financial app for Apple and Android.
  3. Transfer/Rollover Funds: We will help you transfer or rollover your funds from your current custodian to the trust company, so you can gain checkbook control over your investments. With checkbook control, you are trustee of your Solo 401(k), and can make investments simply by writing a check or wiring funds from your bank account.
  4. Invest: Now you can make traditional investments, like stocks, and alternative asset investments, like real estate, notes, investment funds and even cryptocurrencies.

Capital One Bank

IRA Financial has recently partnered with Capital One Bank to simplify how our clients establish their Solo 401(k) retirement plan. Our specialists will open the LLC bank account on your behalf, and complete all documentation for the account. You never have to step foot in a bank. IRA Financial is the only Solo 401(k) provider that can open an LLC bank account for their clients. As a result, this will make your process faster, easier and more cost-effective. 

Establish Your Solo 401(k) with IRA Financial

A Solo 401(k) is cost-effective and easy to administer. When you establish a Solo 401(k) at IRA Financial, a specialist will help you establish the plan and provide you with the necessary documentation.

First, you must fill out an application with your information, such as the adopting employer. You will then be assigned to a 401(k) specialist who will provide you with unlimited consultation. Once you create a trust, IRA Financial will obtain a tax ID # for that trust. Our team will create all the plan documents based on the information you provide in the application.

IRA Financial will send you the information through email, along with instructions on how to open a bank account for your plan. You can open an account wherever is most convenient, such as your local bank. When your account is open, instruct the previous custodian to rollover the funds to the new account. You can make personal contributions to the Solo 401(k) based on your self-employment.

After this is complete, you can begin investing in alternative assets of your choosing.

We wrote the book on the Solo 401(k)

A simple, yet informative handbook, Going Solo: America’s Best-Kept Retirement Secret for the Self-Employed was written to help small business owners and self-employed individuals discover the many advantages of establishing a Solo 401(k) Plan.

In an effort to eliminate the complexity of how one can establish an individual 401(k) plan, Adam Bergman wrote Solo 401(k) in a Nutshell. The book “…simplifies the process (of establishing a Solo 401(k) while…providing everything one needs to maximize their retirement assets” and gain financial freedom.

Learn more about the books →

Get in Touch

You want to self-direct your 401(k)! Call us at 800-472-1043 or fill out the form and we can help you.