Objective information about financial planning, investments, and retirement plans

Consider a Solo 401(k)

One of the major issues facing the self-employed is how to save for their retirement. If you work for a company you likely have a 401(k) plan or other retirement savings vehicle available to you. If you are a self-employed you will need to establish your own retirement savings program.  One option to consider is the Solo 401(k).  Some features of the Solo 401(k):
  • The annual contribution limits are $16,500 plus a $5,500 catch-up contribution if you are 50 or over anytime in 2010.
  • You can combine this with a profit sharing plan and contribute up to an additional 20% of your net self-employment income or 25% of your salaried compensation to a combined maximum of $49,000 ($54,500 if 50 or over).
  • Roth Solo 401(k) plans are also allowed.
  • Contributions are discretionary; the amount can vary (up to the maximums) each year or may be omitted altogether if your cash flow drops.
  • Loans are available from Solo 401(k)s, this is not the case with a SEP for example.
  • If you are considering a Roth IRA conversion, the Solo 401(k) will not factor into the tax and cost calculation as will a SEP-IRA.

Solo 401(k) plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. At most levels of income, the Solo 401(k)/profit sharing combination allows for higher contributions than does a SEP IRA. The 401(k) can be a better option than the SEP if your business income or compensation drops but you still have the means to make sizable contributions. Depending upon the plan document, you may be able to contribute up to 100% of your income/compensation. On downside, once the balance in your account tops $250,000 the level of annual government paperwork increases a bit. 

Sole proprietors, partners, and their spouses are eligible to participate. Corporations and LLCs can also utilize the Solo 401(k). Once a business hires additional employees this type of plan will generally not work.

The deadline to open the 401(k)  is the end of the calendar year. Your contributions must be made by the time your 2010 tax return is filed, including extensions.

Talk with your financial or tax advisor to see if a Solo 401(k) is right for your situation. Feel free to contact me with any questions as well.

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  1. My husband has been rolling over his money into an IRA for a couple years now. We have considered the solo 401k, but we are not sure if our company will be doing well for the first few years with our business. I was wondering if it would be best to stay in an IRA for the first few years and then do a solo 401k?

  2. I am interested in a Roth solo 401k but I've had a difficult time finding providers of a roth option. Where might I find a list of such providers?

  3. Raj I don't have a list per say, but I would start by calling some of the bigger custodians such as Schwab, TD, Vanguard, and Fidelity. I'm guessing they are the most likely to offer the Roth option.

  4. Misty one issue is the amount you are looking to contribute. If the amount is at or less than the IRA limits than no need to look at other options. On the other hand if the business prospers and you want to be able to make larger contributions this might be the time to make the switch.

  5. Thank you for the great information.

  6. Thank you for the great information! More info and how to create a Solo 401k on my website.


  1. […] can look at options that allow for greater levels of retirement contributions such as a SEP IRA, a Solo 401(k), or even a Cash Balance Pension Plan.  If you are thinking of starting a plan yet this year, […]

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