Opening a Solo 401(k)

As a successful small-business owner, Shuey Skaist was eager to lower his taxes while saving for the future. He’d heard that a solo 401(k) could be a great option for business owners like himself, but this was new territory for him. He was comfortable choosing mutual funds on his own but wasn’t sure where to head for account setup and management.

What steps must one take to establish a solo 401(k) for their business?

An Ideal Retirement Option

A solo 401(k) is an ideal retirement option for business owners, offering tax benefits and financial flexibility. These super-flexible accounts, which can be opened at no charge, allow business owners without employees to shelter tens of thousands of dollars annually from taxation. Once opened, the funds can be invested in a wide array of options, and the growth on the accounts is tax-free until withdrawal (or permanently if a Roth account is used).

This is a beginner’s guide that can help small-business owners set up their own retirement plans for a brighter financial future. We’ll cover the process, deadlines, and funding options and review some companies that offer solo 401(k)s.

Let’s go!

How Do You Open a Solo 401(k)?

The first step in opening a solo 401(k) is selecting and opening an account with a financial institution. After choosing a provider from the options below, they will assist in completing the paperwork to set up your account. To create an account, provide business details including legal structure, contact information, and taxpayer ID. This allows you to start contributions.

Your annual contribution limit, determined by business type and income, comprises employer and employee contributions. For 2023, the maximum combined limit is $66K or $73.5K for those aged 50 or over who are eligible for catch-up contributions.

After opening and funding your solo 401(k), you can save for retirement with pre- or after-tax contributions and receive tax-deferred benefits.

What’s the Deadline to Open a Solo 401(k)?

Traditionally, the deadline to open a solo 401(k) has been December 31 of the current tax year. But with the passage of Secure 2.0, that deadline has been extended to the tax filing deadline of the following year for certain business types, not including extensions, starting for the year 2023. Notably, the ability to open a solo 401(k) retroactively for the prior year only applies to solopreneurs who report their income and deductions on Schedule C, such as sole proprietors or single-member LLCs being taxed as such. This is pretty technical stuff, and I recommend you have a conversation with your accountant before opening a retirement account. Since this part of the law is brand-new, you may want to mention that in the conversation.

Where Should You Open a Solo 401(k)?

Here are three companies to consider when shopping for a solo 401(k) provider:

  1. Fidelity

Fees: none

Investments: Fidelity and non-Fidelity mutual funds along with stocks, bonds, ETFs, and CDs

Fidelity is a prominent financial institution that offers a range of accounts, investments, and products, including online registration, with zero fees for their solo 401(k).

One thing to consider is that while Fidelity handles some of the administrative responsibilities, they don’t handle them all. So be sure to do your research and understand what you need to handle when selecting Fidelity as your solo 401(k) provider. In addition, contributions must be made by paper check, and they do not offer 401(k) loans. But Fidelity service tends to be excellent, and they are very interested in helping business owners since entrepreneurs are often excellent long-term customers.

  1. Vanguard

Fees: No fee to open the account but $20 per year for each fund held in the account;
fee waived after $50,000 in assets

Investments: Participants can choose from more than 100 Vanguard mutual funds.

Vanguard is another well-known and established financial institution that offers a broad range of account types, investments, and financial services. Notably, Vanguard requires you to have an EIN for your business, meaning you can’t use your Social Security number as a sole proprietor to open your account. In addition, while some providers offer the option to take out a loan against your solo 401(k), Vanguard does not. Last, while Vanguard explains the process you need to follow to file certain forms once your 401(k) assets reach a specific level, they do not file the forms for you. Vanguard’s service tends to be solid though not tops, and they have a reputation for looking after their clients.

  1. Broad Financial

Fees: up-front fee of $995 plus an annual fee of $149

Investments: Invest in almost any asset class (traditional or non-traditional).

Broad Financial is a unique solo 401(k) provider that offers a self-directed, or “checkbook,” 401(k). This means that instead of investing in traditional assets like stocks or bonds, you can invest in non-traditional assets like real estate, another business, or cryptocurrency. To do so, each plan is custom-built and contains a trust that appoints you as the trustee, allowing you to make investment decisions for the account. (That’s why there are ongoing fees for this type of plan.) Then, a checking account is established that allows you to purchase investments for your solo 401(k).

This type of account opens up entire new worlds of tax-sheltered investment, but there are restrictions on using leverage and self-dealing. You can’t buy a vacation home with your retirement funds, for example. The company’s website explains the rules you must follow if you move beyond the narrow mutual fund world.

What Else do You Need to Know About Opening a Solo 401(k)?

Managing a solo 401(k) requires tracking contributions, withdrawals, investments, and loan regulations like filing IRS form 5500, basically ensuring compliance with relevant laws and plan guidelines. The companies mentioned handle basic plan administration, but it’s important to check with your financial institution to confirm your responsibilities to keep the plan in compliance. Overall, management can be fairly easy once you get it established, and a good provider can help you with any questions you may have and ensure that your plan is running smoothly.

Although it’s important to take the time to learn your responsibilities as you get this set up, most entrepreneurs who use solo 401(k)s find it to be a straightforward way to save a bundle of taxes. With the right provider on your side and by building up some know-how, you should be able to do this on your own. Otherwise, you’ll need to hire a financial adviser.


Want to dig deeper?

Try these related articles

401(k) Loans: Savvy Financial Tool or Tax Trap?

Taxable Income Shifting: An Easy Way to Lower Tax Bills

Scared to Save on Taxes? Your IRA Account  Isn’t a Jail

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