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Retirement

What Is A Solo 401k? Rules, Eligibility, and FAQ

Solo 401k Overview & FAQ

  • What is a solo 401k? A solo 401k is a 401k plan for self-employed individuals or small business owners, offering the highest contribution limits, freedom to choose what you invest in, tax-free compounding, and a Roth option. As the name implies, a solo 401k is a 401k that is established by an individual, rather than by an employer.
  • Who's eligible for a solo 401k? Any self-employed individual is eligible as long as you have no employees that work over 1000 hours per year. The only exception to the no-employee rule is your spouse. There are no age or income restrictions. You're eligible whether you have a $1 million business or drive for Uber on the weekends.
  • Do I qualify if I also have a full-time job? Yes, even if you have a full-time job, you can open a solo 401k as long as you have self-employed business activity. You can make contributions to both your 401k at work, and to your solo 401k.
  • Do I need to be incorporated? No, whether you operate as a sole proprietorship, LLC, corporation, or partnership, any business form is eligible.
  • What's the contribution limit? The solo 401k contribution limit for 2022 is $61,000 ($67,500 if you're over 50). On the employee side, you can contribute up to $20,500 ($27,500 if you're 50 years old). On the employer side, you can contribute up to 25% (up to 20% if you're not incoporated) of your compensation.
  • Are solo 401k contributions taxed? There are two parts to a solo 401k: traditional and Roth. Traditional solo 401k contributions are made with pre-tax dollars, allows for an income reduction for the year, but you get taxed when you withdraw in retirement. Roth solo 401k contributions are made with after-tax dollars, and you pay zero taxes when you withdraw.
  • When is the contribution deadline? You must file an election by December 31st of the year you want to contribute. To contribute for this year, you have until December 31, 2022 (Deadline dates can be a little tricky.)
  • When can you withdraw from a solo 401k? You can withdraw from your solo 401k plan with no penalties, at the age of 59½. Early withdrawals are subject to 10% plus income tax on the withdrawn amount.

If you're self-employed, you don't have access to the most popular investment plan in America: The corporate 401k. And without an employer-sponsored retirement account, it's up to you to plan for your retirement entirely on your own.

That's both good and bad.

The OKAY part: Corporate 401k plans usually suck. You get limited options in what you can invest in, usually a handful of mediocre funds offered by your company. You can't invest in cool stuff like crypto, real estate, private equity, or even individual stocks.

The BAD part: It's still nice to have a retirement account created by your company. At least you have something, and it basically forces you to plan for your future.

The GOOD part: Self-employed individuals have access to something that's even better. It lets you invest in whatever you want (real estate, private equity, mutual funds, individual stocks of companies you like, and even your favorite meme coins), has tax-free compounding, a Roth option, and the highest contribution limits of any retirement account out there.

Enter the solo 401k.

The Ocho Solo 401k Plan comes with an integrated investment platform, robo-advisor, and zero fees on assets under management. Learn more about it here.

What is a solo 401k?

Also known as a one-participant plan, a solo 401k is a retirement account created for self-employed individuals and business owners with no employees.

While it's less popular than retirement accounts like a regular 401k, Roth IRA or SEP IRA, the solo 401k is superior than the three because it gives you more benefits and tax-advantages.

Benefits & Tax-Advantages

  1. Highest contribution limit: The contribution limit for 2022 is $61,000 ($67,500 if you're over the age of 50). In comparison, a traditional 401k plan has a contribution limit of $20,500 ($27,000 if you're over 50 years old). With a Roth IRA, it's just $6,000 ($7,000 if you're over 50).
  2. Tax-free compounding: You pay zero taxes when you sell assets or make a profit from your account. All your money gets compounded tax-free and they're deferred until retirement.
  3. Roth option: Contribute up to $20,500 ($27,000 if over 50) to a Roth account and pay zero taxes on withdrawals.
  4. Tax-free Roth withdrawals: Contributions to a Roth option are made with after-tax dollars, and you pay zero taxes when you withdraw from the account in retirement.
  5. Ability to do a mega backdoor Roth: The mega backdoor Roth strategy can be used with a solo 401k plan and it allows you to contribute the entire $61,000 limit to a Roth account.
  6. Tax deductions: Contributions made to your traditional solo 401k (not the Roth option) are made with pre-tax dollars. The amount you contribute gets deducted from your income tax. If you wish, you can even deduct the entire $61,000 for the year.
  7. Invest in any asset class: With many retirement accounts, your investment options are limited. With a solo 401k, you're allowed to invest in whatever you want, with a few exceptions.
  8. Unlimited rollovers: You can rollover as much as you want from another retirement account and it doesn't affect your contribution limits for the year.
  9. Loan option: You can borrow up to 50% of your plan value up to a maximum of $50,000.
  10. No income requirements: It doesn't matter if you make $500 a month with a side business or $500,000 a year. Any self-employed business activity makes you eligible as long as you have no full-time employees.
Eligibility Rules Any self-employment activity with no full-time employees that work over 1,000 hours per year. Your spouse is allowed.
Contribution Limits For 2022, the contribution limit is $61,000, and $67,000 if you'll be at least 50 years old by December 31, 2022.
Roth contributions $20,500 ($27,000 if you're over 50) of the $61,000 contribution limit can be put into a Roth solo 401k.
Tax deductions Contributions made to a traditional solo 401k account are paid with pre-tax dollars and are tax deductible. Contributions made to a Roth solo 401k are paid with after-tax dollars.
Tax-free compounding Yes. With a solo 401k, you don't pay any taxes on gains in your account.

Because of the high contribution limits, tax-free compounding, and a Roth option, a solo 401k is one of the best accounts to put away the maximum amount of money while paying the least amount in taxes.

Surprisingly, many people aren't aware that the solo 401k exists.

It has a slightly more complex application process than other retirement accounts, and not every broker offers a solo 401k option. And if they do, not all of them are able to offer the full benefits and investment freedom that come with a solo 401k account (for example, some plans don't come with a Roth option or the ability to do rollovers).

There's also a lot more self-management involved. In addition to selecting your own investments, you also have to calculate contribution amounts for both sides, and make sure that you're in compliance throughout the year. And if your plan has over $250K in assets, you’ll also have to file a Form 5500-EZ with the IRS every year.

But perhaps the main reason why many people don't consider opening a solo 401k is that they just don't know that they're eligible for one.

Eligibility Rules

There are only two eligibility rules with a solo 401k:

  1. You must have self-employment activity.
  2. You must not have any W-2 employees that work over 1,000 hours per year in your business (excluding your spouse).

To qualify, you just need any sort of self-employment activity. How much you make does not matter. Even if you work a few days a month on a side business and make an extra $1,000, that makes you eligible for a solo 401k.

The only rule is that you can't have any full-time employees that work over 1,000 hours per year in your business. You're still allowed to work with 1099 contractors, part-time W-2 employees that work under 1,000 hours per year, employees under 21 years of age, and union and non-resident alien employees.

The only exception to the no-employees rule is your spouse. They can work however much they want in your business and both of you will still be qualified for a solo 401k. As the business owner (and your own employee) you still get to have the full benefits of a solo 401k plan. Additionally, your spouse can also create their own solo 401k, also as your employee.

All business entities are eligible for a solo 401k

Any type of business structure is eligible for a solo 401k. Whether you're operating as a sole proprietorship, LLC, partnership, C corp, or S corp, all entities qualify as long as you have self-employment income with no full-time employees.

Common eligibility misconceptions

I'm not eligible because my business is incorporated

Many people believe that they don't qualify for a solo 401k if they're not sole proprietorships. This is false. The business entity you have doesn't matter. All structures are qualified for a solo 401k as long as you meet the two eligibility rules: Self-employment activity + no full-time employees (other than your spouse).

I'm not eligible because I have a full-time job

Even if you have a full-time job, you can open a solo 401k as long as meet the two eligibility rules. You're allowed to contribute to both a 401k at your company, and a solo 401k.

I'm not eligible because I only have a small side hustle

A solo 401k has no income limits. It doesn't matter if you just make a few hundred dollars a month freelancing on the side. Any sort (and any amount)of self-employment income is considered eligible for a solo 401k.

I'm not eligible because I have a partner in the business who is not my spouse

Business owners with partners can open a solo 401k as long as they meet the no-employees rule. Partners will simply be excluded from your plan by your plan provider.

Do I need to have an LLC? Whether you have a sole proprietorship, LLC, corporation, or partnership, any business form with no employees is eligible for a solo 401k plan.

How contributions work

Contributions might be a little confusing at first. With a traditional 401k plan, you make contributions to your account as an employee, and the company you work for makes contributions to your account as your employer.

With a solo 401k plan, you make contributions as both the employer and the employee.

How solo 401k contributions are broken down:

In 2022, you can contribute up to $61,000 ($67,500 if you're over 50) to a solo 401k.

  • Up to $20,500 as an employee (or up to $27,000 if you’re at least 50 years old).
    Up to 25% of your compensation as an employer (Up to 20% if you're not incorporated).

Remember, the contribution limit is capped at $61,000 for 2022, so if you’re contributing $20,500 as an employee, your employer contribution must not exceed $40,500.

Catch up contributions

A solo 401k gives people over the age of 50 an additional $6,500 in catch-up contributions.

This is added to the employee side of contributions, which can increase the amount you can save in your Roth solo 401k.

If you'll be at least 50 years old by December 31st of the year you want to contribute, you're eligible to make catch-up contributions. Rather than contributing $20,500, you can contribute up to $27,000 as an employee.

The best part is, that's more money you can put into your Roth solo 401k.

Tax-free compounding and a Roth option

The solo 401k comes with two different accounts: A traditional solo 401k and a Roth solo 401k.

  • With the traditional solo 401k, you contribute with pre-tax dollars, get an income tax deduction for the year, and pay taxes when you start taking distributions in retirement.
  • With the Roth solo 401k, you contribute with after-tax dollars. You don't get immediate tax advantages, but you pay zero taxes when you withdraw from your account in retirement.

Both accounts have tax-free compounding. You don't pay any taxes when you sell or make money from your investments.

Employer contributions must be made into a traditional solo 401k account.

Employers, however, can choose whether they want to contribute to a traditional account or Roth account.

If you need the tax deduction this year, contributing to a traditional solo 401k could be the better option. If you prefer not to pay any taxes in retirement, the Roth is the way to go.

Tip: With the Mega Backdoor Roth solo 401k, you can contribute up to $61,000 entirely into a Roth account.

Is a solo 401k better than a SEP IRA?

A common question that's asked is: Why open a solo 401k if I can just get a SEP IRA?

The SEP IRA also has a $61,000 contribution limit, and it's more common than a solo 401k because it's easier to open an account.

However, the downside is that there's no Roth version.

If your money's compounding year over year, and you're contributing the maximum amount, the Roth option can be extremely tax-advantageous if your account grows significantly.

Not only that, a SEP IRA is entirely funded by employer contributions, which is calculated by 25% of your income (20% if you're not incorporated).

That usually means that you'll need to have a higher income in order to max out the same $61,000 contribution limit.

  • If you're incorporated, you'll need to make $244,000 a year (25% of $244,000 is the contribution limit of $61,000).
  • If you're not incorporated, you'll need to make $305,000 a year (20% of $305,000 is $61,000).

To max out a solo 401k:

  • If you're incorporated, you'll need to make $182,500 a year. That's $61,500 less than a SEP IRA.
  • If you're not incorporated, you'll need to make $223,000 a year. That's $82,000 less than SEP IRA.

Rollover Rules

Yes. In fact, a rollover is one of the easiest, fastest ways to fund your solo 401k account. You get to save a bunch of money on fees you normally pay your broker, get immediate access to your funds, and gain full control over what assets you invest in.

There's no limit on how much you can rollover. You can rollover as much as you want from your other retirement plans, and it won't affect your contribution limits for the year.

Rollovers need to be planned carefully, though. Any mistakes, and you could trigger unwanted taxes or penalties.

You can rollover almost any type of retirement plan into a solo 401k including:

  • Another 401k plan
  • 403b
  • TSP
  • Pension plan
  • Traditional IRA

Note: The IRS does not allow you to rollover a Roth IRA into a solo 401k, but you’re allowed to rollover a Roth 401k.

You can learn more about how rollovers work here.

Withdrawal Rules

Same as most other retirement plan, you have to wait until you're 59½ years old to start taking qualified distributions. If you withdraw early, you'll be hit with a 10% fee plus income tax on the amount drawn.

If you wait until you’re 59½ or older, there are no penalties for withdrawing. If you opened a Roth solo 401k, the withdrawn amount is tax-free. If you opened a traditional solo 401k, you’ll be taxed according to your tax bracket at the time of withdrawal.

The solo 401k also has required minimum distributions (RMD) that start at the age of 72.

You can learn more about solo 401k withdrawals here.

What if I really, really need the money?

If you really need the money, then there's another option: The solo 401k loan.

Solo 401k loans

With a solo 401k, you're allowed to take out a loan from your own account.

A loan from me to myself from my own account?

Yeah...

Technically, you are lending money to yourself while paying the IRS the interest. Sounds sketchy but at least it's an option, and it beats paying 10% plus taxes on early withdrawals.

How much can I lend myself?

You’re allowed to borrow up to 50% of the plan value up to a maximum of $50,000. Usually, the interest rate is based on the current Prime Rate, plus one or two percent, depending on your provider.

You’ll have to pay back the loan in five years or less. However, if you use the money to purchase a primary residence, you’ll be given 15 years to pay it back.

Taking a solo 401k loan should only be used as a last resort.

Not only do you have to pay interest while borrowing your own money, you're depleting your retirement account of funds that would normally be invested and earning YOU interest.

You can learn more about how a solo 401k loan work here.

I have a side hustle, but I also have a full-time job. Do I still qualify?

Yes. Remember there are no income requirements for a solo 401k. As long as you have self-employment activity with no employees, you're good to go.

You'll be allowed to make contributions to both your solo 401k AND your corporate 401k plan at work.

Just keep in mind that your combined employee contributions must not exceed the 2022 limit of $20,500 ($27,000 if you're 50 years of age or older).

How do I sign up for a solo 401k?

The deadline to set up a solo 401k for you and your business is December 31 of the year you want to contribute. Note that the December 31 deadline is only to set up your account and make an election. An election is basically an official commitment that states how much you'll contribute for the year, and which account you'll contribute to (traditional or Roth). You don't need to actually send the money until you file your taxes. You can learn more about solo 401k contribution deadlines here.

To set up a solo 401k, you’ll need to:

  1. Choose your solo 401k provider.
  2. Get an Employer Identification Number from the IRS.
  3. Fill out an application and required paperwork for the IRS. Your broker should help you with these.
  4. Open bank and brokerage accounts for your solo 401k trust.
  5. Once you’re account is open, rollover funds from an existing retirement account or transfer money from your bank.
  6. Choose your investments.

You can find the complete details on setting up an account here.

The Ocho Solo 401k Plan files your taxes for you, makes sure you're in compliance each year, and curates your investments, with zero fees on your assets under management. Learn more about it here.

More Solo 401k FAQs

How do I qualify for a solo 401k? As long as you have any self-employment activity, and you don't have any employees that work over 1000 hours per year in your business, you're qualified to set up a solo 401k.

How much can I contribute? The contribution limit changes each year, accounting for inflation. In 2020, the contribution limit was $57,000. In 2021, the contribution limit was $58,000. In 2022, the contribution limit is $61,000.

How much can I contribute if I'm over 50 years old? If you'll be at least 50 years old by the end of the year you want to contribute, you're allowed additional catch-up contributions in the amount of $6,500. This brings your total solo 401k contribution limit up to $67,500.

Is there a minimum amount of revenue required to participate in a solo 401k plan? No. There are no age or income restrictions with a solo 401k plan.

Is the solo 401k the same as a one-participant 401k plan? Yes. The solo 401k has a few different names, and is sometimes referred to as a one-participant 401k, solo-k, or uni-k.

What can I invest in through my solo 401k account? Pretty much anything you want. You can invest in real estate, traditional equities like stocks and ETFs, precious metals, private equity, and even crypto.

Should I invest in a Roth solo 401k or a traditional solo 401k? Most plans will give you access to both. On the employer side, you can only invest in a traditional solo 401k plan. On the employer side, it's up to you. Which one you contribute to depends on whether you prefer to deduct your taxable income for the year or pay taxes now, and nothing later.

What's the difference between a Roth solo 401k and a traditional solo 401k? With a traditional solo 401k plan, you contribute with pre-tax dollars, which reduces your taxable income for the year. This option could be helpful if the reduction is enough to drop you a full tax bracket. The downside is that you have to pay taxes when you withdraw from the plan in the future. With a Roth solo 401k plan, you contribute with after-tax dollars. This option is usually the preferred choice, since you don't pay any taxes when you withdraw.

What is the minimum age I can withdraw from my plan? You can withdraw from your solo 401k when you reach the age of 59½. Early withdrawals will be hit with a 10% fee and income tax on the amount drawn.

What if my business has partners? If your business has partners, you can still qualify for a solo 401k. Your provider would need to customize your solo 401k plan to exclude your business partners.

What if I have multiple businesses? If you have multiple business interests, your companies could be subject to controlled group rules or affiliated service group rules. This is a complex topic; read more about it here.

Can I rollover another retirement account into a solo 401k? Yes, you can rollover almost any kind of retirement plan into a solo 401k. In fact, rollovers are one of the easiest, fastest ways to fund your solo 401k account. You can rollover another 401k plan, 403b, TSP, pension plan, or traditional IRA. The only retirement plan you cannot rollover is a Roth IRA.

Learn more about the solo 401k

Here are some of our other resources around the solo 401k plan.

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