A solo 401k plan is only as good as what your provider can offer you. Every solo 401k plan provider is different in the number of benefits and level of support offered.
Cheap or free plans, also called prototype plans, often don’t offer features like Roth contributions, loans, or checkbook control over your investments. Most solo 401k plans offered by major banks and brokerages are basic prototype plans that limit your investments and have minimum features.
Non-prototype plans usually offer a wider range of benefits, such as Roth contributions, more investment options, and higher levels of support. They usually come with higher fees than prototype plans, but typically result in higher tax savings, and higher return potentials through investments in alternative assets.
If you’re opening a solo 401k, it’s important to make sure that the provider can offer you the biggest tax benefits that normally comes with a solo 401k plan.
Ideally, your solo 401k plan provider should provide the following benefits:
A solo 401k gives you the ability to make large Roth contributions. A Roth account lets you contribute in after-tax dollars, and enjoy tax-free withdrawals in retirement. If you’re investing in higher-return potential assets, not having to pay any taxes on the gains after compounding tax-free in your account for years can save you significantly more in taxes than traditional contributions.
In comparison, a Roth IRA only has a contribution limit of $6,000 ($7,000 if age 50+) for 2022 and $6,500 ($7,500 if age 50+) for 2023.
Not all solo 401k plans let you contribute to a Roth solo 401k. If Roth contributions are important to you, make sure that your provider offers a Roth option.
Because a Roth account is so tax advantaged, some people prefer putting as much money into a Roth account as possible.
As mentioned above, the contribution limits of a Roth solo 401k are $20,500 for 2022 and $22,500 for 2023. If you're over 50, your limits are $27,000 for 2022 and $30,000 for 2023.
The total contribution limit of a solo 401k is $61,000 for 2022 and $66,000 for 2023. If you're over 50, your limits are $67,500 for 2022 and $73,500 for 2023.
With a mega backdoor Roth solo 401k, you can contribute the full amount of the solo 401k contribution limit into a Roth account. Essentially, you can put in up to $61,000 ($67,500 if age 50+) into a Roth solo 401k for 2022, and up to $66,000 ($73,500 if age 50+) into a Roth solo 401k for 2023.
In order to be able to do the mega backdoor Roth solo 401k, your plan provider has to specifically be set up to offer the option.
They must provide two features:
A mega backdoor Roth solo 401k involves many steps and can get complex to execute on your own. Your plan provider, if they provide the option, should ideally help you implement the mega backdoor Roth solo 401k.
The IRS lets you invest in whatever asset class you want with a solo 401k. You have total investment freedom, and the only things you're not allowed to invest in are collectibles and life insurance. You can invest in things like stocks, crypto, real estate, or even write checks to invest in startups.
Most prototype low-fee plans offered by major banks do not give you full investment control. You're limited by whatever options they provide in their plans, which can be a small selection of mutual funds and ETFs. In order to invest in alternative assets, you should look for a plan provider that gives you full investment control over your account with no restrictions.
A rollover is one of the fastest, easiest ways to fund a solo 401k. A solo 401k can accept rollovers from any retirement plan except a Roth IRA. If you have funds in an old 401k, SEP IRA, or even a traditional IRA, you can rollover your funds and assets into a solo 401k. There's no limit on how much you can rollover, and rollovers do not affect your contribution limits for the year. For example, you could rollover $100,000 from another retirement plan and still have the full contribution room left over to add even more money to your account.
A solo 401k is generally more complex to set up than other retirement plans like an IRA or SEP IRA. There's more paperwork involved in setting up your account, and requires more steps (like opening separate bank and brokerage accounts). Your plan provider should offer account set up support and administration help for maintaining your plan and staying in compliance.
One of the reasons why a solo 401k is not as popular is because of the complexity in setting one up. Sure, a prototype plan at a major bank is easy to set up, but opening a non-prototype plan involves a complex set up process, and opening separate bank and brokerage accounts for your solo 401k trust.
Let's compare solo 401k plan providers, for both free prototype plans and self-directed non-prototype plans.
The Ocho Solo 401k is a modern version of the solo 401k plan and removes any complexity in opening and contributing to an account. It has the most intuitive user interface, the easiest account set up process, integrated investment platform, and even a robo-advisor.
Integrated investment platform
With a solo 401k, you typically have to go out and set up separate bank and brokerage accounts for your solo 401k trust. With Ocho, you're given an integrated investment platform and bank and brokerage accounts are all set up for you within your account.
Full investment control and robo-advisor
Ocho gives you full investment control so you can invest in whatever asset you like. You could also invest through the Ocho robo-advisor.
The Ocho Solo 401k offers a full Roth option.
Mega backdoor Roth option
Ocho is one of the few plan providers that offer the ability to do the mega backdoor Roth solo 401k. In 2023, you could contribute up to $66,000 ($73,500 if age 50+) into a Roth account with Ocho.
The Ocho Solo 401k plan allows funding your account through a rollover from any retirement account, besides a Roth IRA (which is the only account that can't rollover into a solo 401k, as per IRS rules).
Full account support and administration help
The best part about Ocho is the account support and administration help. It has a modern user interface for an intuitive experience, and the set up process is easier than any other plan provider.
No AUM fees and no kickbacks
The Ocho Solo 401k has simple pricing. There are no fees on assets under management.
Vanguard is a household name when it comes brokerages, and opening a solo 401k with them is quite simple. However, the Vanguard Solo 401k is an example of a prototype plan. Opening an account is much cheaper but your investment options are limited to just Vanguard mutual funds. You can't invest in anything else, not even individual stocks and ETFs.
The Vanguard Solo 401k costs $20 per fund per year. This may sound cheap, but if you invest in several funds, the fees can start adding up. For example, if you invest in 10 different funds, that's $200 per year. If you have $50,000 in assets, the fees are waived. Vanguard does offer a Roth option, but doesn't have the ability to do a mega backdoor Roth.
Charles Schwab offers a free solo 401k. Unfortunately, it's a prototype. While there are no costs for setting up an account, there there is no Roth option, no ability to do a mega backdoor Roth solo 401k, and limited investment choices. You can't invest in alternative assets like real estate, crypto, or private equity. Rollovers are allowed, but you can only rollover a 401k and you can't rollover an IRA or SEP IRA.
E-trade is one of the few prototype solo 401k plans that actually offer decent benefits. There's a Roth option, ability to do rollovers, and no set up fees. While you have a wider selection of investment options, you're limited to stocks, bonds, mutual funds, and ETFs. You cannot invest in alternative assets. Users have also reported that they're having trouble making contributions within their accounts, so it's best to check the current status of their user interface before signing up.
The TD Ameritrade Solo 401k is another low-cost solo 401k plan that lets users open a basic plan. There are no Roth contributions allowed, and you can only rollover funds from a 401k, 401a, 403a, 403b, 408, and 457b. You cannot rollover funds from an IRA or SEP IRA. Additionally, investment options are limited. You can choose from a selection of mutual funds and ETFs.
The Fidelity Solo 401k is a free prototype plan. There's no Roth option or the ability to do a mega backdoor Roth solo 401k. Your investments are limited to stocks, ETFs, bonds, and mutual funds. One of the downsides of a Fidelity Solo 401k is that you must contribute to your account by mailing in a check. There is no ability to make contributions online directly through their admin panel.
My Solo 401k has been around since 2009 and offers a non-prototype self-directed solo 401k plan. There's a Roth option, the ability to do a mega backdoor Roth solo 401k, rollovers, and investment freedom to invest in alternative assets.
RocketDollar was started in 2018 and offers a solid solo 401k plan. It's a little pricier than other non-prototype plans, but you have the option to open a lower tier-plan if you're willing to sacrifice a few benefits. You get full investment freedom, the ability to do Roth contributions, and can invest in alternative assets like real estate and cryptocurrencies.
Ubiquity offers a self-directed solo 401k that gives you full checkbook control, letting you invest in traditional and alternative assets. You can make Roth contributions, do a mega backdoor Roth solo 401k, and rollover funds from existing retirement accounts.
You can contribute to a solo 401k if you meet two requirements:
There are no income requirements, and you're allowed to open a solo 401k even if you receive a 401k at work. For example, if you work at a company and receive a 401k plan, but you also have a weekend side hustle with no employees, you can open a solo 401k. A solo 401k has the highest contribution limits of any retirement plan, a Roth option, and full investment freedom to invest in any asset class you want.
Because you can contribute as both an employee and employer of your own business, you can typically max out contributions to a solo 401k with less income than similar retirement plans like a SEP IRA.
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