Resources for Solo 401k

A Guide to Solo 401K

A solo 401k, < href=" www.business.com/finance/401k/">otherwise known as an individual 401k, is a retirement plan specifically for small business owners or proprietorships. Solo 401ks are an attractive option for the many self-employed individuals looking for a retirement option. In order to be considered eligible for a solo 401k, you must own a small business that has no other employees on staff. Other eligible parties include partnerships, independent contractors, C and S corporations, and LLCs. In addition, businesses with a spouse as an employee can also enroll, and even contribute to a solo 401k.

How to Apply for a Solo 401k

In order to apply for a solo 401k, you must first be considered as an eligible party, described above. In general, only the self-employed are considered qualified for a solo 401k. To start applying for a solo 401k, individuals should first consider the variety of different providers that offer solo 401k plans.    Consider the different details of each provider, such as the allowable contributions, taxable income, and the deductions taken from your income.

Once a plan is established with a provider, owners then need to fill out necessary paperwork by the end of the calendar year.  In order to adequately fill out paperwork, applicants should ensure that they have all the necessary information, such as bank statements, business financial records, and personal data. After signing onto a plan, individuals should be able to start contributing to their solo 401k.

Benefits of a Solo 401K

For small business owners or self-employed individuals, a solo 401k is a viable retirement option. A solo 401k allows individuals to maintain their independence, while setting aside a fair amount for their retirement years. The following are some benefits that solo 401k users can take advantage of:

Contribution Limit:
With a solo 401k, business owners are able to set aside $49,000 a year, depending on the age of the owner. This is a higher contribution allowance than other retirement options, such as the simple IRA, which only allows up to $14,000 a year. Another retirement plan, the SEP IRA, only allows individuals to contribute up to 25% of their income, depending on the type of business they operate. Therefore, the contribution allowances and the lack of income limits makes solo 401k’s an attractive option for individuals considering a retirement plan.   

The benefits of such contribution allowances are apparent during retirement; an owner is allowed to store away more each year. This allows them to build up their funds, allowing them to grow a nest egg for their years after retirement. 

Loans:
A solo 401k can also allow individuals to take out loans, unlike other retirement plans such as the SEP IRA. The individual has the option to pay back the loan within five years, with the interest going straight back to their account.

Management:
Another reason why many individuals turn to solo 401k’s arise from relatively easy management. A solo 401k, compared to other plans, is easy to start and maintain. Once individuals set up a plan with their provider, they are able to put away an amount according to their needs.

For more information about 401k plans, visit our guide pages "401k Plans Basics" and "401k Plans Key Terms."