Do you have a side hustle? Are you self-employed? If so, you may be wondering if there is a way to save for retirement that is specific to your situation. Lucky for you, there is! A Solo 401(k) plan may be the perfect solution for you.
In this article, we will discuss the benefits of a Solo 401(k), as well as the fees and other important details you need to know before setting one up. Let's get started!
Solo 401(k): Benefits, Fees & Everything You Need to Know Table of Contents
What is a Solo 401(k)?
A Solo 401(k) is a retirement savings plan available to self-employed individuals and their spouses. It's similar to a traditional 401(k), but there are some important differences.
How Does a Solo 401(k) Work?
A Solo 401(k) is a retirement plan that allows self-employed individuals or those who own small businesses to save for retirement. It's similar to a traditional 401(k) in that it offers tax advantages and can be invested in a variety of assets, but there are some key differences.
For one, a Solo 401(k) is only available to businesses with no full-time employees (other than the business owner and their spouse). Additionally, there are higher contribution limits for a Solo 401(k) than there are for a traditional 401(k).
If you're self-employed or own a small business, a Solo 401(k) can be a great way to save for retirement.
How to Get a Solo 401(k)
To open an account, you’ll need to fill out some paperwork with basic information about yourself and your business. The account provider will also need to know the name and Social Security number of your designated beneficiary, as well as how you want your Solo 401(k) contributions to be invested.
What Are The Different Types of Solo 401(k)s?
Just like regular 401(k)s, there are several different types of Solo 401(k)s. The most common are traditional, Roth, and SIMPLE Solo 401(k)s.
Traditional Solo 401(k)
Traditional Solo 401(k)s operate just like regular 401(k)s. Contributions are made with pretax dollars, and they grow tax-deferred. That means you won’t have to pay taxes on the money until you withdraw it in retirement.
Roth Solo 401(k)
Roth Solo 401(k)s are a bit different. Contributions are made with after-tax dollars, but they grow tax-free. That means you won’t have to pay taxes on the money when you withdraw it in retirement.
SIMPLE Solo 401(k)
SIMPLE Solo 401(k)s are the simplest type of Solo 401(k). They’re designed for small business owners with fewer than 100 employees. Contributions are made with pretax dollars, and they grow tax-deferred.
What Are The Benefits of a Solo 401(k)?
There are a number of benefits that come with having a Solo 401(k). For one, it can help you save on taxes. That's because the money you contribute to your Solo 401(k) is deducted from your taxable income.
Another benefit of a Solo 401(k) is that it can give you access to more money than other retirement plans. That's because you can contribute up to $18,000 per year ($24,000 if you're over 50).
And if that's not enough, your Solo 401(k) also comes with a catch-up contribution. This allows you to contribute an additional $6000 per year if you're over 50.
What Are The Disadvantages of a Solo 401(k)?
Just like with anything, there are some disadvantages of having a Solo 401(k). These include:
- You may have to pay setup and/or maintenance fees to your financial institution.
- There is a limited amount of money that you can contribute each year. For 2022, the contribution limit is $19,000 (or $25,000 if you're over the age of 50).
- You may be required to take a minimum distribution each year.
- Your investment options may be limited.
- You may have to pay taxes on your contributions and/or earnings when you withdraw the money.
While there are some disadvantages, Solo 401(k)s can still be a great way to save for retirement. If you're self-employed or have a small business, it's definitely worth considering.
Who Are The Best Solo 401(k) Providers?
There are a few different ways that you can set up your Solo 401(k). You can go through a financial institution like Vanguard or Fidelity, or you can use an online provider like Betterment or Wealthfront.
Each option has its own set of pros and cons, so it's important to do your research and figure out which one is right for you.
Here's a quick rundown of some of the best Solo 401(k) providers:
Vanguard is one of the biggest names in the investment world, and for good reason. They're known for their low fees, high quality customer service, and wide range of investment options.
Fidelity is another big name in the investment world, and they offer many of the same benefits as Vanguard. They're also known for their customer service and wide range of investment options.
Betterment is an online provider that offers low fees and a simple, easy to use interface. They don't have the same range of investment options as some of the other providers, but they're a great option for those who want a simple and easy to use Solo 401(k).
Wealthfront is another online provider that offers low fees and a simple, easy to use interface. They also have a wider range of investment options than Betterment, making them a great option for those who want a little more control over their investments.
No matter which provider you choose, the important thing is that you're taking advantage of the Solo 401(k) and saving for your future.
What Commissions and Management Fees Come With Solo 401(k)s?
As with any 401(k), there are fees associated with a Solo 401(k). However, these fees are often much lower than those of traditional 401(k)s. For example, many Solo 401(k) providers charge an annual management fee of around 0.25% of the total value of the account. This is significantly lower than the fees charged by most traditional 401(k) providers, which can be upwards of 0.50% or more.
In addition, some Solo 401(k) providers may also charge a small commission for each trade made within the account. However, these commissions are often much lower than those charged by traditional brokers. For example, Charles Schwab charges a commission of $0 per trade for all online equity and ETF trades made within a Solo 401(k) account.
What Is The Minimum Amount Required to Open a Solo 401(k)?
The answer to this question may vary depending on the financial institution you go through but typically, the minimum amount required to open a Solo 401(k) account is $0. Some brokers will require a higher minimum deposit, usually around $1000-$2500.
What Are The Eligibility Requirements for a Solo 401(k)?
To be eligible for a Solo 401(k), you must:
- Be self-employed with no other full-time employees
- Have earned income from your business (including profits, commissions, and salaries)
- Not be employed by another company (part-time work doesn't count)
If you meet these requirements, you can open a Solo 401(k) and start contributing to it right away. There's no need to wait for an employer to set one up for you - you can do it all yourself.
How Much Can You Contribute to a Solo 401(k)?
The contribution limit for a Solo 401(k) is $19,500 per year, plus an additional $6000 if you're over the age of 50. If you have a profit-sharing plan in place, you can contribute up to 25% of your net self-employment income.
What is The Solo 401(k) Contribution Deadline?
The deadline for making Solo 401(k) contributions is the tax filing deadline for the year. For most people, this means April 15th of the following year. However, if you file for an extension, you have until October 15th to make your contribution.
What Are Some Alternatives to a Solo 401(k)?
There are a few alternatives to a Solo 401(k), but they may not be as beneficial.
One option is to open a Traditional IRA or Roth IRA. However, these have much lower contribution limits than a Solo 401(k). Another option is to use a SEP IRA, which has higher contribution limits but also has some drawbacks.
A SEP IRA is a good option for business owners with employees, but it comes with some administrative burdens. Also, the contribution limits are lower than they are for a Solo 401(k). Overall, a Solo 401(k) is usually the best option for self-employed individuals.
How Does a Solo 401(k) Compare to a 401k?
A traditional 401k is offered by an employer and typically has lower fees than a Solo 401k. However, a traditional 401k doesn’t offer the same level of flexibility as a Solo 401k.
For example, with a traditional 401k you’re limited to investing in the options offered by your employer. With a Solo 401k, you have a much wider range of investment options.
Another key difference is that a Solo 401k offers more generous contribution limits than a traditional 401k. For example, the 2020 contribution limit for a traditional 401k is $19,500. But if you’re over 50, the catch-up contribution limit is an additional $6000, for a total of $25,500.
With a Solo 401k, the contribution limit is $57,000. That’s more than double the traditional 401k limit!
So if you’re self-employed or have a side hustle, a Solo 401k could be a great retirement savings option for you. Just be sure to compare Solo 401k providers to make sure you’re getting the best deal.
What Is The Difference Between a Traditional IRA & a Solo 401(k)?
The primary difference between a traditional IRA and a Solo 401(k) is that the latter is designed for self-employed individuals or those who run small businesses with no employees. As such, it offers more flexibility in terms of contributions and investment options.
For example, you can contribute up to $19,000 per year to a Solo 401(k), compared to just $6000 for a traditional IRA.
Another key difference is that Solo 401(k)s are not subject to the same rules and regulations as traditional IRAs. This means that you can use your Solo 401(k) to invest in a wider range of assets, including real estate and hedge funds.
You also have more control over how your money is invested, as you are not limited to the investment options offered by a traditional IRA.
When Can You Withdraw Money From a Solo 401(k)?
You can withdraw money from your Solo 401(k) at any time, for any reason. However, if you withdraw money before you're 59 ½ years old, you'll be subject to a ten percent early withdrawal penalty.
When Should You Open a Solo 401(k)?
You can open a Solo 401(k) at any time, but there are a few key times when it makes sense to do so:
- When you're self-employed
- When you have a side hustle
- When you're maxing out your other retirement accounts
Is It Easy to Switch to a Solo 401(k)?
The short answer is yes, it is easy to switch to a Solo 401(k). In fact, you can even set one up on your own if you have the time and patience. However, we highly recommend working with a financial advisor to ensure that everything is done correctly and efficiently.
Can You Lose Money With a Solo 401(k)?
The short answer is yes, you can lose money with a Solo 401(k). However, there are ways to minimize your risk. For example, you can diversify your investments by investing in different asset classes. Additionally, you can rebalance your portfolio on a regular basis to ensure that your risk is minimized.
How Much Should You Contribute to a Solo 401(k)?
The IRS allows you to contribute up to $18,000 annually to a Solo 401(k), plus an additional $24,000 if you're over the age of 50. But how much you should contribute depends on your personal financial situation and retirement goals.
If you can afford to max out your contribution, that's great! But if you can't, don't worry. Just contribute as much as you can afford. Every little bit helps when it comes to retirement savings.
Does a Solo 401(k) Earn Interest?
Yes, a Solo 401(k) earns interest. The interest rate is set by the financial institution where the account is held and may change over time. Currently, most banks offer an interest rate of around 0.50% for Solo 401(k)s. This means that for every $100 in your account, you’ll earn 50 cents in interest each year.
While the interest rate on a Solo 401(k) isn’t high, it’s important to remember that your money is tax-deferred. This means that you won’t have to pay taxes on the interest until you withdraw the money from your account.
Do You Pay Taxes On a Solo 401(k)?
If you're wondering whether or not you'll have to pay taxes on your Solo 401(k), the answer is no. Your Solo 401(k) contributions are made with after-tax dollars, so you won't be taxed on them when you withdraw them in retirement.
However, any investment earnings in your Solo 401(k) will be taxed as ordinary income when you withdraw them.
What is a Solo 401(k) IRA Rollover?
A Solo 401(k) IRA rollover is a great way to save for retirement if you're self-employed. With a Solo 401(k), you can contribute up to $18,000 per year (or $24,000 if you're over 50). Plus, you can get a tax deduction on your contributions