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