Are you ready to join the 79% of self-employed workers who are saving for retirement? Do you know where to start or which account type is right for you? Setting up a Solo 401(k) retirement plan is a great option for self-employed workers.
This retirement plan allows account holders to make significant contributions as the employer and employee. These high contributions can be used to invest in real estate if you have the correct plan, a Self-Directed Solo 401(k). Opening an account can be done in five easy steps, let’s explore how to get started.
What is a Solo 401(k)?
A Solo 401(k), also known as a one-participant 401(k) plan or individual 401k for self-employed individuals, is a retirement plan designed for a business owner with no employees. IRS stipulations mandate that business owners cannot have full-time employees apart from a working spouse. This plan allows for high contribution limits compared to other retirement plans. Once the retirement age is reached, self-employed workers can begin to make withdrawals.
Why Consider a Self-Directed Solo 401(k)?
Although most self-employed workers have had a retirement savings plan since age 29, most are not saving consistently. And it is important to maintain consistency to achieve success.
Solo 401(k) plans encourage self-employed workers to save for retirement through designated funds in a tax-advantaged account. These self-employed 401k plans allow tax-deferred savings and Roth funds. Roth funds have already been taxed, allowing investments to grow, and be withdrawn in their Solo 401(k) without being taxed. These funds can then be used to invest in alternative assets, like real estate!
Here are some reasons why small business owners choose an Individual Self-Directed 401(k):
Diversification
Self-directed plans enable you to diversify your retirement portfolio beyond traditional assets like stocks and mutual funds, potentially reducing risk.
Invest in What You Know
If you have expertise in specific alternative investments, such as real estate, a self-directed plan allows you to leverage that knowledge.
Tax Advantages
These self-directed plans maintain the same tax advantages as traditional Solo 401(k)s. The high annual contribution limits can help lower your income taxes.
Step 1: Determine Eligibility for a Solo 401(k)
You must be a business owner with no employees. This is a 401k for individuals with a small business or personal 401k for the self-employed. No age or income requirements exist to be eligible for a Solo 401(k) plan. The only requirement for your business is that it is actively engaged in a for-profit enterprise.
This applies to both small business owners and self-employed individuals. Part-time employees are okay as long as no one employee exceeds 1,000 hours of service per year threshold.
If you are self-employed, you must qualify as a self-employed individual. This can include sole proprietor business owners, independent contractors, or an individual member of a partnership that carries on a trade or business. Individuals who receive passive income or any other income besides wages, compensation, or self-employment income cannot make Solo 401(k) contributions.
If you're unsure about meeting the Solo 401k requirements, feel free to reach out to us for assistance.
Step 2: Find a Provider for a Solo 401(k)
While you don't need a custodian for a Solo 401(k), choosing the best Solo 401k provider is crucial. Many financial institutions and financial advisors offer self-employed 401(k)s, and some can even manage the plan administration for a fee.
Look for a Solo 401(k) provider that stays on top of IRS updates and offers a user-friendly recordkeeping system. This will ensure keeping your plan compliant and your reporting to the IRS accurate.
Consider factors like cost, investment diversification, and contribution flexibility (loans, Roth option). Research and compare providers to find one that aligns with your financial goals and makes managing your Solo 401(k) a breeze.
Step 3: Gather Documents Needed to Open a Solo 401(k)
Opening a Solo 401(k) retirement account is a prudent step for self-employed individuals and small business owners looking to save for retirement with tax advantages. To get started, you'll need to gather and provide several important documents:
- Employer Identification Number (EIN): If you haven't already, your business will need to obtain an EIN from the IRS. This number serves as your business's unique identifier for tax purposes.
- EIN for Solo 401(k): An EIN serves as a unique identifier for your Solo 401(k) plan. It is used for various administrative purposes, such as reporting plan contributions and distributions to the IRS. It helps keep your retirement plan separate from your business finances because it is not using your business EIN.
- Beneficiary Information: You'll need to specify who will inherit your Solo 401(k) funds in the event of your passing. Make sure to have that information handy. If you don’t have all the information, this can always be added later and not required to open an account.
- Personal Identification: Standard identification documents like your driver's license or passport will be required to verify your identity.
- Bank Account Information: You'll need to link a bank account to your Solo 401(k) for contributions, withdrawals, and management of funds. If you don’t have one, you can create one during the onboarding process.
It's important to note that the exact documentation requirements can vary depending on your chosen plan provider and the complexity of your financial situation. Below is IRAR’s easy onboarding process.
Step 4: How to Open Your Solo 401(k)
Once you have your ducks in a row in the first three steps, you are ready to open an account. To get the most benefit from the account, it’s best to open it before the tax-filing deadline of April 15th for sole proprietors, single-member LLCs, and C-Corporations. Alternatively, you can still open a Solo 401(k) account after the year ends and make prior-year contributions.
Establishing a New Self-Directed Solo 401(k)
At IRAR you can establish your plan by completing a Self-Directed Solo 401(k) Account Application and creating a user ID. Once you have completed the required information and paid the annual fee, you will receive your Plan Adoption Agreement and access to your online recordkeeping portal. The process is simple, and it takes approximately 7 minutes.
You will receive your Plan Adoption Agreement: This is a critical document that outlines the specific terms and conditions of your Self-Directed Solo 401(k) plan. This document includes details about how your employer-sponsored retirement plan works according to IRS regulations. It should also convey specific information about your plan, like available investment options. Last, it should outline employee rights and responsibilities like employee eligibility, contribution limits, matching contributions, and vesting schedule.
Moving or Transferring an Existing Solo 401(k) to a Self-Directed Plan
If you currently have a Solo 401(k) with any financial institution, you can move it to a Self-Directed Solo 401(k) by following the next step:
Resign from Current Provider
It’s important to make sure you are not terminating your Solo 401(k) Plan. You are simply terminating the plan agreement you have with the current provider because you will be moving it to a new provider.
This is done by providing your current plan provider with a letter that states the termination of Plan Document Service. IRAR will provide a copy to help you with this document during our onboarding process.
Step 5: Funding Your Solo 401(k)
During the onboarding process or opening your Solo 401(k), you will be asked to link your bank account or open a new account with a bank if you don’t have one. It’s important to make sure you use the EIN for your Solo 401(k) NOT the business EIN when establishing your bank account.
You can fund your new Solo 401(k) checking account by making an initial tax-deductible contribution or by transferring funds from one or more of your existing retirement accounts or IRA into the new checking account.
With our Solo 401(k) recordkeeping platform at IRAR, you have full visibility of all your bank transactions pertaining to your Solo 401(k). This enables you to effortlessly maintain accurate records for compliance and reporting purposes.
Why You Should Choose IRAR As Your Self-Directed Solo 401(k) Provider
At IRAR, we aim to empower investors to get the most out of their tax-favored retirement plans by strategically leveraging alternative investments such as real estate. Our Individual 401 k for self-employed and small business owners offers:
- A competitive flat annual fee, no transaction fees.
- Free restatements and IRS reporting
- Roth savings allowed
- Real estate investments allowed
- An online recordkeeping platform to easily keep your books in order.
Don’t delay! You can open an account today. Call us at 888-322-6534 or consult with an expert to discover effective strategies to plan for a financially stable and affordable retirement.
Bonus: Solo 401k Frequently Asked Questions
Can you open a 401k for an Individual with small business?
If you're a small business owner with no full-time employees (other than yourself or a spouse) and want to set up a retirement savings plan similar to a 401(k) you can open a Solo 401k plan. This is your closest equivalent to a traditional 401(k) for an individual but you must have a business or be self-employed.
Can a solo 401k be self-directed?
Absolutely! Solo 401(k)s can be self-directed, allowing you more control over your retirement investments. This means you can choose a wider range of assets beyond the typical stocks, bonds, and mutual funds offered by traditional retirement accounts.
How does a self-employed 401 k work?
A Solo 401(k) is a retirement plan for self-employed individuals. To hold this type of plan, you must have a business and no employees. You are the administrator of the plan and have full managing responsibility. It allows you to contribute as both an employer and employee, just like traditional 401(k)s. Contributions must be made from earned income. In 2024, the combined employee and employer total contribution limit for the tax year is $69,000 ($73,500 if you're 50 or older).
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