What is a Solo 401k?

A Solo 401k plan is a type of qualified retirement plan as defined in the Internal Revenue Code, Section 401, Paragraph k.

The sole purpose of the Solo 401k plan is to provide a vehicle for reducing taxable income that can be invested into a wide range of assets in order to provide retirement income at the appropriate time.

Terms used to describe the Solo 401k:

Individual 401k
Self Employed 401k
Personal 401k
Single k
Individual k
Uni-k

What is a Solo 401k Plan Designed for?

The Solo 401k plan is designed for a small business owner who has no full-time employees other than themselves or a spouse. The plan may be self-administered by the business owner, making him or her the “trustee” and thereby eliminating the need to engage a third party to handle administration or investments.

Solo 401k Contributors and Deferrals:

Like any full-blown 401k plan, for any sized company, the Solo 401k has two parts: employee deferral and employer profit sharing. Since the small business owner is both employee and employer, he/she can decide how to fund both sides of the equation or not to fund it at all (since there is no requirement to do so).

Depending upon the income level of the business, a combination of employee deferral and profit sharing could equal as much as $49,000 (or $54,000 if over the age of 50).

Solo 401k Personal Loans :

A distinguishing feature of the plan from other types of self-employment plans is that the small business owner is able to take out a personal loan (for any purpose) from the plan. Loan limits are 1/2 the value of the assets, or a maximum $50,000. The loan is paid back over a 5 year period. For many self-employed persons, this is a valuable benefit of the plan since traditional loans may not be available.

Investments with the “self-trusteed” Solo 401k plan, can be made into stocks, bonds or mutual funds and also into non-traditional types of assets such as:

Real Estate (Residential, Commercial, Raw Land)
Secured & Unsecured Notes
Tax Liens & Deeds
Equipment Leasing
Private Company Stock
and much more…

Initial Funding of Solo 401k Plan:

Initial funding of the plan, may come from rolling over any of the following retirement plans:

Traditional or Rollover IRA
SEP IRA
SIMPLE IRA
401(k) from a previous employer
Profit Sharing Plans
Defined Benefit Plans
Most other pension and retirement plans

Roth IRAs may not be rolled into a Solo 401k plan, but a Roth account can be created inside the plan. Rolled funds, or future contributions, once received by the plan, can be converted to a Roth account.

To Sum It Up:

The Solo 401k is the best option for anyone who is self-employed (with no full-time employees other themselves or a spouse) and would like to maximize contributions to their retirement plan or take advantage of the loan provision.