Tuesday, July 9, 2024

How To Set Up A Solo 401k Account

Don't Miss

Who Can Open A Solo 401

How to Set Up a Checking Account for Your Solo 401k

As mentioned, Solo 401s provide self-employed individuals a place to save for their retirement. The term individual is vital because Solo 401s are limited to small business owners with zero employees.

Freelancers and the self-employed tend not to have any employees however, small businesses with even one other employee on the books are not eligible.

There is one caveat to this rule. If your spouse is the only other person employed by your small business, both of you can contribute and receive matching contributions from the business-but more on that in a bit.

How Much Does It Cost To Open A Solo 401

There is no cost to open a 401 account but watch out for those fees later on. While you’re researching your options, check for account maintenance fees, transaction fees and commissions, mutual fund expense ratios, and sales loads.

A fractionally higher fee can mean a big hit to a retirement portfolio. If you make the right choices you can minimize the fees you pay.

Choose The Right Provider

With your provider, its important to ask questions. Two common questions people ask are how to make contributions with the Solo 401, and how to use the Solo 401 loan.

However, tailor your questions to your specific needs. At IRA Financial Group, you can call at 401 specialist for a free consultation. With the 401 specialist, you can answer any questions you may have regarding the Solo 401 retirement plan.

You have a few options when choosing a provider to set up a Solo 401k plan. Here are the three options you have to easily set up a Solo 401.

Recommended Reading: How Does 401k Work If You Quit

How A Simple Ira Works

The SIMPLE IRA follows the same investment, rollover, and distribution rules as a traditional or SEP IRA, except for its lower contribution thresholds. You can put all your net earnings from self-employment in the plan, up to a maximum of $13,500 in 2021 , plus an additional $3,000 if you are 50 or older.

Employees can contribute along with employers in the same annual amounts. As the employer, however, you are required to contribute dollar for dollar up to 3% of each participating employee’s income to the plan each year or a fixed 2% contribution to every eligible employee’s income whether they contribute or not.

Like a 401 plan, the SIMPLE IRA is funded by taxdeductible employer contributions and pretax employee contributions. In a way, the employer’s obligation is less. That’s because employees make contributions even though there is that mandated matching. And the amount you can contribute for yourself is subject to the same contribution limit as the employees.

Early withdrawal penalties are hefty at 25% within the first two years of the plan.

How To Start A 401 Plan With No Retirement Savings Over 40


The benefits of entrepreneurship include work you love, favorable hours and a solo 401 retirement account. A solo 401 is accessible for sole proprietors with no employees, or one whose spouse earns income from your business, and wants to start or continue a retirement plan. An individual or solo 401 can lead to a future with a quality of life just as good, if not better, than the one you have now, if you treat it right. Among its key advantages — you can sock away considerably more pre-tax money than you can with most other plans, including a traditional 401. And the solo 401 is simple to set up and maintain.

Don’t Miss: How Much Does 401k Cost Per Month

Where To Open An Ira

You can set up an IRA at almost any bank, brokerage, or other financial institution. All it takes is your signature on the paperwork and a check for your first contribution.

You can also take care of most of the details online. In fact, online brokerages have eclipsed traditional brokerages to become the primary way people sign up for new accounts. The best brokers for IRAs and Roth IRAs have user-friendly interfaces and valuable informational materials, which makes opening and maintaining an account easier than ever.

Individual Taxpayer Identification Number

What it is: An Individual Taxpayer Identification Number, or ITIN, is a nine-digit tax ID number for nonresident and resident aliens, their spouses and their dependents who cannot get a Social Security number. The IRS issues the ITIN.

How to get an ITIN: To get an ITIN, fill out IRS Form W-7. You must prove your foreign/alien status and identity. Also, you must supply a federal income tax return to your Form W-7 . Organizations called acceptance agents have IRS authorization to help people get ITINs.


  • You cant claim the Earned Income Tax Credit if youre using an ITIN to file your taxes.

  • ITINs always begin with the number 9.

  • Expirations: Any individual tax ID number not used on a tax return in the past three years as well as individual tax ID numbers with middle digits 88 expired at the end of 2020. ITINs with middle digits 90, 91, 92, 94, 95, 96, 97, 98 or 99 that were assigned before 2013 and not renewed also expired at the end of 2020.

You May Like: How Do You Split A 401k In A Divorce

Benefits Of A Vanguard Solo 401k

Working for yourself has its benefits, especially in todays volatile economy. But theres one area that many feel it lacks saving for retirement.

When you dont have an employer-sponsored 401K, you may feel like its impossible to save for your golden years with the small limits placed on a traditional or Roth IRA. Fortunately, theres an answer the Solo 401K.

As the name suggests, the Solo 401K is only for individual business owners. If you have employees, you wont qualify. Its strictly for solo-business owners that want to save for retirement while realizing the same tax benefits employees with sponsored 401K accounts have.

The solo 401K has many benefits, most importantly and obvious is the ability to save for your retirement as an entrepreneur. You dont have to be a specific age, and in fact, if you are over 50-years old, you can make catch-up contributions that exceed the already high maximum contribution allowances.

In 2020, you may contribute a maximum of $57,000 per year. This includes your contributions as an individual as well as contributions as an employer.

If you are over 50-years old, you are allowed to contribute an extra $6,500 per year too. Like most other traditional retirement accounts, including the traditional 401K and IRA, you contribute the funds pre-tax.

Loans From A Solo 401k

How to Set Up a Solo 401k Plan [Walkthrough]

One potential advantage of a solo 401k is that they often allow you to borrow from the account. This can be helpful in the event of an unexpected cost.

You are allowed to borrow up to $50,000 from a 401k or 50% of your balance, whichever is less. Loans must be paid back with interest within five years.

Interest rates can vary depending on the administrator. They are usually a percentage point or two higher than the prime rate. Currently, this rate is about 3.25%.

Not all brokers allow for solo 401k loans. Be sure to check the fine print when researching plans.

Taking out a loan from your 401k should only be done when its absolutely necessary. Whenever you take money from an account , you could reduce the amount you will accumulate over time.

Generally speaking, youll earn more in the long run if you leave the funds alone.

Also Check: What To Do With Your 401k

You Can Rollover Previous 401s

Lastly, you can rollover your old 401s-even from previous employer-sponsored plans-into your Solo 401.

When managing your retirement savings, consolidating your accounts makes it easy to monitor how well your investments are performing.

Beagle does the hard work for you to find your old 401s, identify any hidden fees you might be paying, and gives you advice on how best to consolidate them. for free to get started organizing your retirement accounts.


What Are The Tax Benefits Of A Solo 401

Solo 401s share the same tax benefits as their traditional 401 counterparts.

You can elect to contribute pre-tax earnings to your Solo 401 and pay taxes when you distribute your funds during retirement. In turn, youâll lower your immediate income tax obligation.

Or, you can choose to contribute after-tax earnings into a Roth Solo 401, then your distributions during retirement would be tax-free.

Additionally, any matching contributions you make as your employer are tax-deductible for your business, lowering its tax obligation as well.

Read Also: How To Check My 401k Plan

Administering A Solo 401 Plan

Once your Solo 401 plan exceeds $250,000 in assets at the end of the year, the IRS requires you file an annual Form 5500 EZ. Or if you ever terminate the plan, you must also file a Form 5500 EZ.

Unlike Traditional 401 plans, there are no compliance testing requirements to ensure Solo 401 plans do not favor highly compensated employees and are non-discriminatory, as long as you have no employees participating in the plan.

These plans can be called Self-Directed 401, Individual 401, Individual Roth 401, Self-Employed 401, Personal 401 or One-Participant 401 depending upon the vendor offering the plan services.

How To Start A 401

New Deadlines for Setting up the Solo 401k

Setting up a 401 plan can be as simple or as complicated as you like. Most people outsource at least some portion of the process. In particular, they use a template legal document to establish the 401 plan, which is substantially less expensive than hiring attorneys to draft original documents. Unless your retirement plan is especially complicated or youre trying to get fancy , youll probably use preconfigured programs from 401 vendors. These programs are often called volume submitter or prototype plans, and theyre an excellent choice for most companies and nonprofits.

Here are the crucial pieces of any 401 plan. While this list seems extensive, in some cases, a single company provides several of these services.

The plan document is a legal document that details the rules of your 401 plan. It defines specific terms, and provides a roadmap for any questions that come up when administering the plan. The plan document is a long legal document that most people never see. Instead, employees receive a shorter version of the document, known as the Summary Plan Description , when they enroll in the plan. For reference, heres a sample of a plan document.

Recommended Reading: Is It A Good Idea To Borrow From Your 401k

Strategies For Saving When Youre Self

The joys of self-employment are many, but so are the stressors. High among those is the need to plan for retirement entirely on your own. You are in charge of creating a satisfying quality of life post-retirement. When it comes to building that life, the earlier you start, the better. Luckily, there are several retirement plans for those who are self-employed.

How To Open A Sep Ira

Nearly all brokerage firms offer SEP IRAs, and in most cases they can be opened online. A formal written agreement is required, known as IRS Form 5305-SEP, but the brokerage will usually take care of that. Opening fees and annual fees are often zero.

You can benefit from SEP IRA tax breaks for a given tax year by opening your account by your annual tax filing deadline, which is usually in mid April.

When opening an account, be sure to note minimum investment requirements and investment options. While SEP IRAs usually have a broader range of choices than 401 accounts, the choices are more limited than those available in a standard brokerage account.

Also Check: How Do I Use My 401k To Start A Business

How To Get Started

Right about now, you may be feeling that you don’t have enough time to do this properly. It’s easier than you think.

You can probably open an IRA at the bank where you already have an account. Just be sure that the fees are reasonable.

Roth IRAs and traditional IRAs are both excellent choices. The traditional IRA saves you money every tax year during your working years. The Roth means a little more pain upfront for a lot of gain after you retire.

Remember, you can always change your investment decisions or even switch providers altogether if you find a better deal.

Best of all, you can set up automated payments to add to your new IRA regularly. That way, you can grow your investments every year and reap long-term financial benefits in the future.

To Mail Contributions To Fidelity

Deadline for Setting up a Solo 401k
  • Make your check payable to Fidelity Investments. Include your account number in the memo section of the check.
  • Include a completed 401 Contribution Remittance Form with your check, each time you contribute to your plan.
  • Mail the check and completed remittance form to:

    Fidelity InvestmentsCincinnati, OH 45277-0003

  • Also Check: How Do I Find 401k From Previous Jobs

    What Paperwork You Need To Fill Out To Open Your Account

    I was surprised at how much paperwork is required to open a solo 401k account. You’d think it would be simple, with very common forms to fill out. However, it’s completely the opposite. It becomes even more challenging if you add a Roth solo 401k, and you have to do double the paperwork if you’re adding a spouse to your plan.

    When opening your solo 401k plan, you will need to create the following documents. You will need to create separate plan documents for both your Traditional and Roth Solo 401ks. They are both considered separate plans for tax purposes.

    Plan Documents For Traditional Solo 401k

    • 401k Plan Adoption Agreement
    • Designation of Successor Plan Administrator

    Plan Documents For Roth Solo 401k

    • 401k Plan Adoption Agreement
    • Designation of Successor Plan Administrator

    Required Documents For Individual

    • Brokerage Account Application for 401k Account
    • Brokerage Account Application for Roth 401k Account
    • Designation of Beneficiary Form for Account
    • Power of Attorney

    Required Documents For Spouse

    • Brokerage Account Application for 401k Account
    • Brokerage Account Application for Roth 401k Account
    • Designation of Beneficiary Form for Account
    • Power of Attorney

    When you’re done with all these documents, you’ll have two solo 401k plans, and 4 accounts .

    How Do I Open A Sep Ira

    It’s easy to open a SEP IRA account online. The first step is to choose an account provider. Here are our top picks for best IRA account providers.

    Then, the IRS outlines three steps for setting up your SEP IRA:

  • Create a formal written agreement. You can do this with IRS Form 5305-SEP or through your account provider.

  • Give eligible employees information about the SEP IRA. You can give them a copy of IRS Form 5305-SEP or get similar information through your account provider.

  • Set up separate SEP IRAs for each eligible employee with the account provider.

  • Recommended Reading: How Much Can I Loan From My 401k

    Open A Depository Account For Your 401k Funds

    As the leader in Self-Directed Investing, we have preferred bankers ready to assist you and provide white-glove service in opening your bank account effortlessly and compliantly. You can also open a checking account in the name of your Solo 401k Trust at your favorite bank or brokerage firm. Your Solo 401k bank account is there to provide you complete checkbook control for investing with your Solo 401k.

    What Is A Self

    Setting up a Solo 401k Brokerage Account

    A 401 plan is an employer sponsored retirement savings plan established per provisions of the US tax code. Such plans first came into existence following the enactment of the Employment Retirement Income Security Act of 1974 .

    A Solo 401 is a relatively new iteration of this type of plan dating to 2001 and passage of the Economic Growth and Tax Relief Reconciliation Act . This law increased the contributions available to the self-employed version of the 401 and generally streamlined the administration of such plans.

    Income from the sponsoring employer may be contributed to the plan on a tax-deferred or Roth basis. Contribution limits are more generous than with IRA based plans, potentially as high as $63,500 per participant.

    Since its introduction, the Solo 401 has become the favored option for successful business owners to save for their retirement future, and offers many advantages over options such as SEP IRAs, SIMPLE IRAs and Keough plans. For self-employed investors who qualify, this is our recommended plan of choice.

    Income from the sponsoring employer may be contributed to the plan on a tax-deferred or Roth basis. Contribution limits are more generous than with IRA based plans, potentially as high as $63,500 per participant.

    This type of qualified retirement plan is also sometimes referred to as an Individual 401, Owner 401 or self-employed 401.

    You May Like: What Is My Fidelity 401k Account Number

    What Is A Tax Id Number

    A tax identification number, or TIN, is a unique nine-digit number that identifies you to the IRS. It’s required on your tax return and requested in other IRS interactions. Social Security numbers are the most popular tax ID numbers, but four other kinds are popular too: the ITIN, EIN, ATIN and PTIN.

    How Do They Work

    When you set up a Solo 401K, you are both the employee and the employer. In other words, you make both contributions, but one comes from your earnings and the other from your profit-sharing.

    Employees can contribute as much as $19,500 per year toward your retirement account. If you make less than $19,500, you may contribute 100% of your earnings and again, if youre over 50-years old, you may contribute the extra $6,500.

    You also contribute as the employer. This money comes from your companys profit sharing. Youll need the following equation to determine how much you may contribute as the employer:

    • 25% x you earned income ½ of your self-employment tax
    • The maximum contribution is $57,000 as an employer.

    Read Also: How To Access An Old 401k Account

    More articles

    Popular Articles