A solo 401(k) can be an excellent option for self-employed individuals who want to save at a higher rate than a SEP IRA or SIMPLE IRA allows. However, it also comes with more administrative work than a traditional IRA. For instance, you’ll need a broker to record the value of any real property in the account. This information is necessary to borrow against the account’s assets.
With a self-directed solo 401(k), you can invest in “almost anything that is allowed by the IRS, including real estate, precious metals, and cryptocurrencies,” he says. Off-the-shelf options generally offer only traditional equities, mutual funds, and cash alternatives, such as money market funds and bank certificates of deposit.
Another thing to look for is whether the solo 401(k) provider allows you to make both Roth and traditional contributions and how flexible they are when investing in alternative assets like promissory notes, tax liens, mortgage notes, private equity, or partnerships. Not all solo 401(k) providers allow this, and if you use an alternative asset that’s against the rules, it could cost you in terms of fees or taxes. You should also consider how easy it is to set up the plan. The best solo 401k providers offer online forms to fill out to get started. They can also handle all the paperwork needed to file an IRS Form 5500-EZ, which is required for most retirement accounts.
A solo 401(k) plan is an excellent retirement option for self-employed individuals. However, choosing a provider with expertise in the field and an understanding of IRS compliance regulations, contribution limits, and reporting requirements is essential. By doing this, you can enjoy the plan’s benefits and prevent any possible tax penalties.
The first step in setting up a solo 401(k) is finding a brokerage that offers this type of account. There are many options, but fees, investment options, and customer service are all factors to consider. Choosing a broker with a good track record in these areas will help you maximize your savings potential. You can open a solo 401(k) at any online brokerage, but some have special features that make them stand out. For example, a solo 401(k) plan includes a loan provision allowing you to borrow funds from your retirement account without paying taxes. This feature is especially helpful for business owners needing capital access to grow their businesses. A solo 401(k) is similar to a SEP IRA but has advantages over other individual retirement account (IRA) types. For one thing, the contribution limit for a solo 401(k) is higher than for a SEP IRA, which can be up to $57,000 for the 2020 calendar year.
When it comes to taxes, you should know a few things. First, you must have an EIN, which you can obtain by visiting the IRS website. This number will identify your business and all related financial documents. You should also have a business bank account and be able to deposit money into it.
Next, you must determine if you want to open a traditional or Roth solo 401(k) plan. Traditional solo 401(k) plans allow pre-tax contributions, while Roth solo 401(k) permits tax-free withdrawals in retirement. If you choose a traditional solo 401(k), you must contribute at least 20% of your net adjusted self-employment income. If you opt for a Roth solo 401(k), you can contribute up to 25% of your net adjusted self-employment income, but you can only make tax-free withdrawals in retirement.
Finally, you must decide whether to use a brokerage-based or self-directed solo 401(k). A brokerage-based plan will limit the investment options to those the provider offers. This option is more popular with business owners uncomfortable managing their portfolios. Finally, most solo 401(k) providers will let you take out a loan from your account. While this isn’t always advisable, it can be helpful in certain circumstances. Moreover, the loans are usually at a low-interest rate.
A solo 401k offers many advantages over retirement plans for self-employed individuals and small business owners. It has the highest contribution limits, a Roth option, and the freedom to invest whatever assets you want. It also allows catch-up contributions for savers over 50. Unlike a SEP IRA, a solo 401k can accept after-tax employee deferrals and employer profit-sharing contributions without plan-triggering events or hardship distribution requirements.
In addition to traditional investments, you can invest in a wide range of alternative assets such as real estate, private equity, promissory notes, mortgage notes, precious metals, and more. However, it’s important to understand the rules before investing in these types of assets. A mistake could cost you a lot of money in taxes and penalties.
Rollovers are an essential feature of a solo 401k because they allow you to transfer funds from another retirement account into your new account. It’s essential to do this if you’re changing jobs, retiring, or moving to a different tax bracket.