October 15, 2019

Solo 401k – Best idea out there

There can be a lot of benefits when you are self employed.  You are the boss.  You can set your own hours, dress code, and when you will take vacations.  Most self employed owners do not realize there is another great benefit:  Solo 401k.  There are other retirement options like a SIMPLE IRA or a SEP, but I think a Solo 401k is the best option. 

A Solo 401k account is an under utilized retirement plan option for a small business (really small….one employee and their spouse only or a partnership).  So, it can work well for consultants, sole proprietorships, farmers/ranchers, attorney’s, etc…  It can work extremely well for highly compensated individuals that want to save a lot for retirement.   As always, run any tax strategy by  your tax professional.

Good but Boring Benefits:

Contribute up to $19,000 as an employee (or $25,000 if over 50).  Businesses can make profit sharing contributions up to $37,000 for a total of $56,000 (or $62,000 if over 50).    This is better than a SIMPLE plan.

A SEP (Self Employment Plan) does not allow for “catch-up” contributions and you can be limited on the overall contribution of the business if the profits are down.

Ability to do a back door ROTH.  With a SEP  the IRS Pro Rata rule will limit how attractive that is.  This is a way highly compensated families can still contribute to a ROTH account. 

Minimal fees to open a non-complex Solo 401k.  In a traditional 401k administrative fees can be well over $2,000, so really doesn’t make sense.  A solo 401k does not have those high fees.

The benefits above are great and are similar to your traditional 401k options.  Now comes the best part of a Solo 401k.  This is the stuff that you can brag to your brother-in-law (the one with the cushy job who talks about how great his corporate 401k is doing).  We call these the:


Ability to a do add a ROTH 401k option.  The employee’s contribution will be after tax dollars and would grow tax free.   


Not recommended by financial advisors, but you can get a loan against the value of your solo 401k which you can’t do with a SIMPLE or SEP.

Unlimited invest choices – a traditional 401k is like going to McDonald’s and ordering off the set menu.  Hamburger, fries, 2040 Target Dated Fund, and a Small Cap fund.  You can’t “have it your way”.  You are stuck with the choices that the retirement plan provides.  With a Solo 401k, the options are endless with stocks, mutual funds, ETF’s.  I wouldn’t recommend getting crazy with your choices (like 3X Leverage Oil fund or investing in Bitcoin), but at least you have the opportunity to invest with low cost index funds.

MEGA BACK DOOR  ROTH – if you want to contribute to your traditional and boring ROTH account, you can only do $6,000 (or $7,000 over 50)  As I mentioned above, you can put a ROTH Solo 401k option into your plan, so you can contribute up to $19,000 (or $25,000 if over 50) into that account.  Any business contribution would have to go the into the traditional 401k account which is before tax dollars.  However,  another option is to have the business owner contribute after tax dollars up to $37,000 and convert that to the ROTH 401k.  So, that is basically $56,000 into a ROTH account versus the usual amount of $6,000.  I think the term MEGA works in this equation.

Professional Management – it is hard to get any investment advice when it comes to a traditional 401k.  You are basically on your own or have to go a website to figure what you are doing.  A Solo 401k, allows an advisor to help manage the portfolio and how it fits into your overall investment goals. 

For those stuck with a traditional 401k, maybe this will inspire you to be that entrepreneur and go out on your own.  If so, give me a call and you can have your own Solo 401k.