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Solo 401(k) Plans

If you’re a small business owner and are interested in a retirement plan, you may be choosing between a SEP IRA, SIMPLE IRA or 401(k) plan. Many choose self-direction via a SEP or SIMPLE Individual Retirement Account (IRA). Others choose a traditional 401(k) plan for their businesses.

But, if you’re eligible, you could also choose to self-direct your retirement via a Solo 401(k).

Solo 401(k) plans are also known as Individual(k), Individual 401(k) and Solo(k) plans. The IRS even refers to them as One Participant 401(k) plans. Regardless of what you call them, these plans are essentially traditional 401(k) plans covering only a business owner (with no other employee participation) or the business owner and his or her spouse.

Like a SEP IRA held by a self-employed person, the business owner is considered the employee and the contributions can be made in both capacities. That’s the main difference between a Solo 401(k) and a regular 401(k)—otherwise, the same rules and requirements apply. Also, like SEP and SIMPLE IRAs, the employer may make tax-deductible contributions and can contribute as little or as much as he or she likes, up to certain annual limits.

A Solo 401(k) plan can switch to a regular 401(k) plan should the employer hire additional employees that become eligible under the plan. However, the new plan would lose some of the “solo” plan benefits.

Note also that Solo 401(k) plans may also have a Roth option.

Therefore, if you prefer, you can make post-tax contributions to the plan instead of pre-tax contributions. This is unlike SEP or SIMPLE IRAs, which are always in a pre-tax structure.

However, not all brokerage firms and administrators allow this option. It’s important to check with your potential plan administrator to see if the firm will allow Roth contributions. Also, only employee contributions can be post-tax contributions; any employer contributions must remain pre-tax contributions.

It’s important to know the contribution rules and limits as you consider this retirement plan. While a Solo 401(k) often allows for the largest contribution (versus a SEP or SIMPLE), that’s not all to consider. Solo 401(k) plans are usually not as complex or costly to maintain as a regular 401(k), either. But setting up a Solo 401(k) plan will probably require more paperwork than setting up a SEP or SIMPLE IRA, which only requires one formal document.

Is a Self-Directed Solo 401(k) better for you than a Self-Directed IRA? That’s ultimately up to you and your team of professionals. Learn as much as you can about contribution limits, funding flexibility, access to loans, distribution flexibility and maintenance costs. Your team of professionals can also help you complete the plan documentation, which your custodian will need a copy of when setting up an account for your Solo 401(k).

If you’re interested in a Solo 401(k) plan, Kingdom Trust can custody the plan (though we cannot serve as administrator). Simply open an account today to get started, or contact us and we’ll walk you through the process!