what is the best way to use a 401k

Reviewed by: Roger Wohlner, Investing Editor

One of the perks of working for a company full-time is that y'all may have admission to a 401k plan to help prepare for retirement. These plans permit yous to contribute money to an business relationship and invest to build wealth.

All the money you put in is deducted from your taxable income. Some employers match contributions up to a specific percentage.

Certain plans may also offer a Roth 401k option for contributions made on an after-tax basis. This creates the opportunity to withdraw your savings tax-complimentary in retirement.

If yous are self-employed, you lot may believe you don't take access to a 401k. That's not true!

Many discount brokerages offer special "solo 401k" plans for small business organisation owners and their family members. Solo 401k plans are often referred to as "ane participant" or "individual" 401k plans.

Let's examine the details of a solo 401k and a few companies that offering them. You lot tin can so decide if this plan makes sense for you.

In This Article

What is a Solo 401k?
Major Brokerage Solo 401ks
- 1. Fidelity
- 2. TD Ameritrade
- 3. Charles Schwab
- iv. E-Trade
- 5. Vanguard Solo 401k
- six. Merrill Edge Individual 401k
Cocky-Directed 401k Options
- 7. Rocket Dollar
- 8. Accuplan
- 9. MySolo401kFinancial
Other Things to Know
- Contribution Limits
- Revenue enhancement Advantages
- Loans from a Solo 401k
- Taxation Forms
- Income Calculations
Differences from a SEP-IRA
What Happens if You lot Hire Employees?
Summary

What is a Solo 401k?

A solo 401k is a retirement plan designed for people who work for themselves. If you run a small business with no employees, you can qualify for a solo 401k.

Your spouse can qualify if he or she is involved in the business organisation. A fellow business partner who is an owner is as well eligible.

The key is that no mutual-police force employees are eligible to participate. A solo 401k is non the right option for your concern if you have employees that you want covered by a retirement programme.

This retirement program can be a powerful tool in your savings efforts. It allows you to invest in just about anything. Investment options include stocks, mutual funds, bonds and exchange-traded funds.

Keep in mind in that location are some prohibited investments. Consult with your 401k custodian firm for more than information.

Contributions to a solo 401k tin be fabricated on a pre-tax basis to a traditional business relationship. They can as well be fabricated on an after-tax basis to a Roth business relationship if your custodian offers this option.

Only similar employer 401k plans, you typically can't withdraw coin in a solo 401k until age 59 ½. Taking money out earlier and so ways you lot may pay taxes on those funds in addition to a 10% penalty.

Major Brokerage Solo 401ks

Many major online brokerage firms offering a 401k selection for self-employed people. Most plans are similar but may accept different costs, options or features.

It's worth researching all of these companies to see which one offers a solo 401k that is a expert fit for you lot.

Nigh major disbelieve brokerage firms will ready a solo 401k at little to no cost. Information technology'due south important to note that they may charge commissions each time you trade a bond, stock, mutual fund or other investment.

Therefore, it would be wise to avoid making frequent pocket-size, purchases. Make larger trades spread out over an extended flow instead.

1. Allegiance

With $8.8 trillion full client assets under management, Fidelity is one of the world'south largest discount brokerage firms. It offers a Self-Employed 401k with access to a wide range of investment options.

This account has no minimum balance requirements and $0 commissions for online ETF, U.S. stock and options trades.

Free one-on-one investment advice is available via phone or in person at i of its many investment centers.

You lot can contribute the maximum of $xix,500 per twelvemonth to a Allegiance Self-Employed 401k as the employee. As the employer, you can contribute upwardly to 25% of compensation (up to $57,000.)

Allegiance does not offer a Roth 401k selection where contributions tin abound taxation-gratuitous.

I commenter on Allegiance'due south website noted this lack of a Roth option every bit a major drawback.

"I'm strongly because switching if Fidelity doesn't roll out the Roth characteristic soon," they wrote. "I've been otherwise very pleased with Allegiance's offerings and services."

Pros: Large investment selection, low fees

Cons: No Roth option.

2. TD Ameritrade

TD Ameritrade is another prominent discount broker offer a solo 401k with a broad spectrum of investment options from which to cull.

Employee contributions top out at $19,500 with employer contributions up to $57,000 or 25% of bounty.

There are no maintenance or commission fees for online trades on the TD Ameritrade Solo 401k account. Look to pay a $.65 fee for options trades and a $six.95 commission for any stocks not on a U.Southward. substitution.

TD Ameritrade allows you to make loans from your Solo 401k account. Additionally, at that place is a Roth option. Read our full TD Ameritrade review for all the details.

Pros: No maintenance fees, many investment options, Roth pick bachelor.

Cons: $0 committee fees simply utilize to U.S. exchange-listed ETFs, options, and stocks.

3. Charles Schwab

Schwab is one of the oldest discount brokerages with some of the lowest costs. The company offers an individual 401k with no maintenance fees or trade commissions.

With Schwab, you can invest in a broad range of stocks, bonds, mutual funds and ETFs.

Yous tin can contribute up to xx% of profit sharing on top of the $19,500 salary deferral max. All contributions can't exceed more than $57,000, per the IRS limit.

Taking loans from a Schwab Private 401k is non permitted. Furthermore, Schwab does non offer a Roth 401k option.

Pros: Big option of investments, and Schwab ETFs and more than 500 others trade with no commission. Schwab too offers 1-on-one investment help at no charge.

Cons: Loans are not permitted. No Roth 401k choice.

iv. East-Trade

Eastward-Trade is synonymous with online investing and was named the #one online banker past Kiplinger. The company offers a 401k for cocky-employed people with access to a wide universe of investments.

The brokerage business firm has a traditional and Roth solo 401k option. Information technology's possible to carve up contributions betwixt the ii.

You can trade stocks and ETFs for $0. Options cost l to threescore cents. Mutual funds with a transaction fee are $nineteen.99 per trade.

You tin paw over management of your solo 401k to East-Merchandise Capital Direction. They offer various portfolios to fit your needs.

The smallest portfolio requires at least a $25,000 minimum investment with a 0.65%-90% blended annual informational fee.

Eastward-Merchandise allows contributions of upward to 100% of bounty or $57,000 annually, whichever is less.

Dissimilar some brokerages, you are permitted to make loans from an E-Merchandise solo 401k programme.

Pros: Large investment choice. Roth 401k option available. Ability to brand loans.

Cons: Loftier price of $xix.99 to trade common funds.

5. Vanguard Solo 401k

Vanguard is a pioneer in depression-cost investing. They offering an individual 401k option for small business organisation owners and their spouses.

Investment choices are limited to about 100 Vanguard common funds, including 38 index funds with depression expense ratios.

Fees include a $20 per yr charge for each account. You won't pay commissions on each investment purchase.

The company offers a Roth option. Loans from an individual 401k are not allowed.

Pros: Low costs. Roth option available.

Cons: Investment choices express to Vanguard funds. No loans allowed.

six. Merrill Edge Individual 401k

Merrill Edge is a Bank of America subsidiary offering an individual 401k.

Fees include $100 for setup and a monthly fee of $20 for businesses with plan assets nether $250,000. For businesses to a higher place that threshold, the monthly fee is $25.

Merrill Border allows for loans and has a Roth 401k option. The provider lets you invest in mutual funds or model portfolios from Morningstar Investment Management.

Broker	Commission/Fee	Loans Allowed?	Roth Option?
Fidelity	$0 per merchandise	No	No
TD Ameritrade	$0 per online trade, $.65 for options trades, $six.95 for non U.Due south. exchange stocks	Yes	Yes
Charles Schwab	$0 per trade	No	No
Eastward-Trade	$0 for stocks and ETFs, $19.99 for common funds	Aye	Yep
Vanguard	$0 to $20 per trade, depending on investment. $twenty per twelvemonth account fee.	No	Yes
Merrill Edge	$100 setup fee, $twenty-$25 per month maintenance.	Yes	Aye

Self-Directed 401k Options

If you want to set up a solo 401k but prefer not to use a major discount brokerage firm, y'all tin go through a company offering a cocky-directed plan.

These companies essentially allow you to serve as the custodian and recipient of the 401k plan.

Self-directed plans may be worth exploring if yous want access to some non-traditional investments. These may include individual debt and equity, early on-stage venture uppercase or precious metals.

Here are a few of the more prominent options in this space:

7. Rocket Dollar

Rocket Dollar lets you take a self-directed solo 401k plan with the ability to invest in almost annihilation permitted by the IRS. Expect to pay a $360 upfront business relationship setup fee and then $15 per month after that.

Rocket Dollar offers admission to a broad range of asset classes through a variety of partnerships with investment groups. They include:

Existent estate

The DeRosa Group
Quinlan MacKay
Aerial Investment Management
Height Storage Properties
SDIRA Wealth
Rich Uncles
BCP Services

Early-phase investing

WealthBlock
Dealbox
Honeycomb Credit
Mr. Crowd
KingsCrowd
yard Angels

Physical avails

Energy Funders
Harvest Returns
US Gold Bureau

Private Equity and Debt

Cadence
Carofin
DarcMatter

viii. Accuplan

Accuplan Benefits Services offers a cocky-directed solo 401k plan with access to real manor investments. Using their one.yard program, you tin can purchase existent estate directly, purchase options on properties and even flip properties.

To facilitate this, Accuplan will found LLCs or C-Corps for you and fix the 401k plans for those companies. Under this setup, you direct the company's investments as a trustee.

9. MySolo401kFinancial

MySolo401k offers self-directed plans for minor business organization owners. They allow you to invest in real estate, precious metals, tax liens, promissory notes and private equity. You tin even invest in Bitcoin through MySolo401k.

Across that, MySolo401k will allow you lot invest in stocks and mutual funds since information technology will help you fix a brokerage business relationship through one of the discount brokerages higher up.

The initial setup fee is $550, and so y'all'll pay a $125 annual fee after 12 months.

A solo Roth 401k choice is bachelor and you lot can take out loans on the business relationship.

Other Things to Know

Be sure to continue these other things in mind likewise.

Contribution Limits

There are annual limits to the amount of money y'all tin contribute to your solo 401k. For example, in 2020, an individual could put aside a maximum of $57,000. Anyone over the age of l could contribute $63,500.

When y'all make these contributions, yous make them as both an employee and an employer.

"The business owner wears ii hats in a 401(k) program: employee and employer," the Internal Acquirement Service notes. "Contributions can exist made to the plan in both capacities. The owner can contribute both."

If you lot accept a solo 401k program, you tin contribute up to $nineteen,500 in "elective deferrals," up to a maximum of $57,000 including profit-sharing contributions. These contributions are made by the employer.

Thus, if yous contribute the maximum in elective deferrals, you can contribute no more $37,500 in profit-sharing. Got it?

For those who are l or over at any point during the yr, the maximum elective deferral is $26,000 in 2020. This includes a $6,500 catch-up contribution.

Profit-sharing contributions can't exceed more than 25% of your employee compensation. This might exist your salary if you draw a salary from the business organisation or your income as a sole proprietor.

Depending on your earnings, your maximum allowable contribution may be lower than 25%.

Your contributions may also be limited by the broker of your 401k plan. Nosotros'll offer some details on those possible restrictions afterwards.

Tax Advantages

A solo 401k program allows you to pay less in income taxes. All contributions to solo 401k plans are deducted from your taxable income for a not-Roth program.

For example, let's say you earn $100,000 and contribute $19,000 to your 401k. Merely $81,000 of your income would exist taxable.

In some cases, this may move you to a lower taxation bracket. As a issue, in that location's a great incentive to contribute as much as possible.

Additionally, any profit-sharing contributions reduce the income of your concern. Consequently, they are a deductible business expense.

With a traditional solo 401k, you are required to pay taxation on whatever investment gains once you withdraw money at retirement age.

Deciding whether or not to open a traditional or Roth 401k depends on many factors. These can include your current income and tax bracket besides as your projected tax bracket and income in retirement.

Talking to a financial counselor may help determine the best plan for you.

Loans from a Solo 401k

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 immune to borrow upwards to $50,000 from a 401k or l% of your balance, whichever is less. Loans must be paid back with interest inside five years.

Involvement rates can vary depending on the administrator. They are ordinarily a per centum point or two higher than the prime rate. Currently, this rate is about three.25%.

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

Taking out a loan from your 401k should only be done when it'southward absolutely necessary. Whenever you take money from an account (even if you lot pay it back), y'all could reduce the corporeality you volition accumulate over fourth dimension.

Mostly speaking, you'll earn more in the long run if you leave the funds solitary.

Revenue enhancement Forms

If your solo 401k account reaches more than $250,000 in value, the IRS requires you to fill out a 5500-EZ form annually. The form asks for basic programme data, your contributions for the year and total assets.

Income Calculations

Small business concern owners may demand to do more than calculate their income and profits to determine how much they can put into a solo 401k. This is especially truthful when figuring out the profit-sharing portion of your income.

Profit sharing is express to 25% of the employee'south compensation. In cases where he/she draws a bacon from the business organization, it is 25% of that W-2 compensation.

Thus, that percentage ends up existence closer to 20% of sole proprietor income due to the quirks of the calculations of the schedule as information technology flows through the 1040.

Calculating this can be circuitous. The IRS has a calculator to help you determine how much you can contribute.

Differences from a SEP-IRA

If you lot work for yourself, you may already have opened a Simplified Employee Pension.

SEP-IRA and solo 401k plans are like. They both allow contributions of up to $57,000 and unremarkably let you to invest in a wide range of products. However, a solo 401k may be a ameliorate option in some situations.

Here are a few of the key differences to exist aware of:

A SEP-IRA can have more one participant.
A SEP-IRA does not offering a take hold of-up contribution for those who are 50 or over.
Employee deferral contributions are non allowed with a SEP-RA.

What Happens if You Hire Employees?

A solo 401k is an appropriate programme for a person who works for himself or who has a spouse or business partner involved in the company. It is non suitable for a company with employees.

If you accept a solo 401k and hire workers, you will exist required to switch your solo 401k to a traditional 401k plan. Doing this can come up with hefty administrative costs and rules.

You may want to explore a SEP-IRA if y'all think you'll hire workers in the time to come. A SIMPLE IRA, which allows for employee contributions, is besides an choice.

Summary

If you are a small-scale business owner with no employees, you can however take advantage of a 401k programme. In fact, the high contribution limits on solo 401k plans go far a potentially lucrative choice for you as yous plan for retirement.

Information technology'south difficult to recommend any single broker because all have their pros and cons. Some offering low costs but limited investment options. Others are more flexible but accept higher fees.

The key to selecting a solo 401k provider is to evaluate your needs. Then y'all can cull the option that all-time fits your situation. If you are unhappy with 1 provider, you can curl the business relationship over to a dissimilar company.

Speaking to a financial advisor may aid if you are considering opening a solo 401k. They tin can requite you guidance on which provider to select, how much to contribute, and what investment choices to make.

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Source: https://wellkeptwallet.com/solo-401k-options/