How to Open Solo 401k

How to Open Solo 401k

Guidelines

1. Familiarize yourself with all the various Solo 401k providers as the types greatly vary based on features and services that you are looking for. For example, Solo 401k providers range from broker dealers to banks, and self-directed Solo 401k administrators that assist you in administering the plan, but you ultimately serve as the primary administrator and Trustee.

2. Before you open Solo 401k, determine what investments you are looking to make. For example, if you plan to invest in alternative investments such as real estate (rentals, fixer-uppers, land, foreign real estate, etc.), promissory notes (e.g., trust deeds, unsecured notes, etc.), tax liens, private companies (e.g., Limited Partnership, private placements, etc.) and precious metals (e.g., gold and silver bars or coins), you will most likely want to open a self-directed Solo 401k with a provider whose Solo 401k documents allow for alternative investments as well as permit you to serve as the Trustee of your own Solo 401k plan.  On the other hand, if you are looking to only invest in traditional investments known as equities (e.g., stocks and mutual funds), you may want to open Solo 401k with a brokerage firm such as Fidelity or Charles Schwab.  However, some self-directed Solo 401k providers also offer Solo 401k for investing in alternative investments which can be opened at Fidelity, Charles Schwab or TD Ameritrade, thus making it easy for you to continue investing in equities.  


3. Consult with your financial professional regarding how much you should contribute to Solo 401k to reach your retirement goals.


4. Understand the annual Solo 401k contribution rules as they generally increase each year, but may be reduced in the coming years stemming from the government need for more tax revenue.   

5. Maximize your annual Solo 401k contributions. For example, for 2012 tax year you can contribute as much as $50,000 and an additional $5,500 if you are age 50 or older, and the full amount is fully tax deductible. And the best thing about Solo 401k contributions is that you can contribute as much or little as you want, provided you have the self-employment income to support the contribution and don’t exceed the annual limit.     

6. Since Solo 401k plan allows for incoming rollovers or transfers consider consolidating all of your retirement plans including IRAs by rolling them over to Solo 401k. Not only will this greatly reduce annual fees, transaction fees and investment fees, you will also gain access to more funds that can be borrowed through a Solo 401k Loan.  

7. Make Solo 401k contributions no later than your tax return due date plus extensions.

8. Open Solo 401k by 12/31 in order to make annual contribution by your tax return plus extension duet date. 

Facts and Additional Information

• Any self-employed business type qualifies for Solo 401k. For example, independent contractors incorporated or unincorporated businesses, partnerships, sole proprietorship and Limited Liability Company. The key is that you do not have any full-time employees; however, you can still open Solo 401k if you have part-time employees, defined as those working 1,000 hours or less.

• Use Solo401k contribution calculator to ensure you do not exceed the annual Solo 401k contribution limits.

• The only type of retirement account that cannot be rolled over to Solo 401k is Roth IRA. For full list of retirement account types that can be rolled/transferred to Solo 401k visit Consolidating Retirement Plans .

• The Solo 401k Participant loan is available to each Solo 401k participant, and the maximum loan limit per participant is 50% of their individual account balance not to exceed $50,000; therefore, when added-up, both business owners can borrow a combined maximum amount of $100,000 from the Solo 401k plan.