A Solo 401k is the best option for business owners with no employees other than themselves and their spouses. These accounts have the most significant potential contribution limits.
They also allow participant loans, which are helpful for several reasons. Let’s take a look at four of the advantages that a Solo 401k provider can offer you:
Tax Deductions
A solo 401(k) is a retirement plan option for sole proprietors and self-employed individuals. It has a lot of benefits that other retirement plans don’t, such as being able to take out a loan and the potential to make an investment in nontraditional assets (such as real estate, tax liens, precious metals, private business opportunities, and crowdfunding).
Advisors can help clients establish these accounts and start their investment strategy by providing valuable insight into their unique needs. They can also fill in the gaps between what the plan provider does and the client’s responsibility, such as opening accounts, tracking contributions and distributions, and preparing Form 5500-EZ.
Generally speaking, most solo 401(k) providers offer a free account setup and low-cost annual fees. There are a few exceptions, however, so research the fees for your specific broker.
Flexibility
A solo 401k plan is suitable for anyone self-employed and not a full-time employee of another business. That could include a sole proprietor, a partnership, or a formally structured LLC, C Corp, or S corporation. The only caveat is that the sole proprietor or partner cannot employ anyone else in the business and that the business must generate qualified business income (QBI) to qualify for a Solo 401k. Those with other W-2 jobs can also open a Solo 401k if they earn an appropriate income. However, they must still contribute to the annual maximum in their regular company-sponsored retirement plan.
One of the most significant advantages of a best solo 401(k) companies over other retirement savings options, such as a SEP IRA, traditional IRA, or Roth IRA, is that funds contributed to a solo 401k are tax deductible up to IRS limits. This provides a dollar-for-dollar reduction in taxable income, which is especially beneficial for business owners who have both a 9-to-5 job and a side hustle that earns additional income.
Solo 401k plans also allow participants to serve as trustees, giving them “checkbook control” over their assets. This eliminates the need to hire a custodian and reduces fees incurred with a traditional custodial plan. It also allows a participant to make nontraditional investments such as real estate, crypto assets, and precious metals, which are typically not permitted in other types of retirement accounts.
Scalability
Whether you’re a freelancer or own an entire business, the scalability of the solo 401k can provide an essential boost to your retirement savings. This is because unlike other types of retirement accounts, such as a SEP IRA, Keogh plan, or SIMPLE IRA, the solo 401(k) can have both employee and employer contributions.
This allows you to save more each year if you contribute the maximum amount. Plus, you can also make Roth contributions, which are tax-free withdrawals in retirement. This can be particularly helpful if you believe that future tax rates will be higher than they are now.
As an additional benefit, the scalability of a Solo 401(k) plan can provide you the flexibility to invest in nontraditional assets like real estate, crypto coins, and physical assets. Many off-the-shelf plans limit these investments or do not allow them at all.
Choosing the right provider can be one of the most important decisions you make regarding your retirement planning. You want to ensure that your account is managed professionally and that you’re not being charged unnecessary fees. Look for a company that offers low startup and ongoing fees and avoids hidden costs and surprises.
Convenience
A Solo 401(k) doesn’t require a custodian, which can reduce administration fees significantly and save thousands of dollars. Moreover, a trustee-directed plan will let you diversify your investment portfolio by investing in various asset classes that might be off-limits to other retirement accounts.
Another essential advantage of a solo 401(k) is the ability to make Roth contributions, compared to IRAs and other self-employed plans like the SEP IRA or SIMPLE IRA. This can boost your savings by allowing you to grow your investments tax-free. Additionally, a solo 401(k) allows for participant loans, unlike IRAs, allowing you to borrow up to 50% of your vested account balance or $50,000, whichever is less.
Finally, a solo 401(k) offers high contribution limits, allowing you to put more money into your account than if you invested in a traditional IRA or SEP IRA. This can boost your retirement savings potential and wealth-building.
While a traditional solo 401(k) is an excellent option for most, it’s essential to choose the right provider to manage your account. A great broker will offer a full range of investment options, low fees, and excellent customer service. Look for a provider that doesn’t deceive you with hidden fees on statements, transactions, or withdrawals. Rocket Dollar is a highly-rated broker that offers a full range of options for your Solo 401(k), including alternative investments, such as real estate and venture capital.
