Solo 401k – Best Retirement Plan for Self-Employed Business Owners

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solo401kThe wealth management group Del Monte published a whitepaper on Solo 401k plans, calling it the “financial industry’s best kept secret” and a “powerful and underutilized” retirement plan for self-employed business owners. The 4-page PDF does a good job at summarizing the benefits of a Solo 401k, aka Self-Employed 401k. Perhaps most importantly, the Solo 401k allows the maximum annual tax-sheltered contribution (or ties for the max) for all income levels and ages.


Here’a a quick benefit comparison against the SEP-IRA and SIMPLE IRA:


The key difference is the Solo 401k allows an $18,000 salary deferral at any income (i.e. if you make $18k or under, you can put aside all of it) for 2017 and then adds on a profit-sharing component. In addition, Solo 401ks a larger additional “catch-up” contributions at age 50.

I’ve had a Self-Employed 401k through Fidelity for several years, and I have been quite happy with it. The paperwork has been minimal, although you must start filing IRS Form 5500-EZ once your asset exceed $250,000 or face significant penalties. (It’s one page long.) It has been quite flexible – I am able to purchase mutual funds, ETFs, individual stocks, CDs, and individual Treasury and TIPS bonds. There is no annual fee and I’ve only had to pay trade commissions. Fidelity also accepts rollovers from outside IRAs and 401k plans.

Vanguard, Schwab, and TD Ameritrade also offer cheap in-house Solo 401k plans that work well for low-cost DIY investors. There are now several independent providers with “custom” 401k plans which can offer features like 401k loans the ability to invest in alternative asset classes (precious metals, tax liens, real estate, private equity, etc.) at additional cost. Vanguard and TD Ameritrade offer a Roth option; Fidelity and Schwab are only available with “traditional” pre-tax contributions.

Another option to consider is the Solo Defined-Benefit Plan, or “Solo Pension”. The annual maintenance fees are higher and the IRA requirements are significantly more complex, but you can make much larger amounts of tax-deferred contributions (dependent on age and income). The most affordable option appears to be the Schwab Defined-Benefit Plan. If anyone has any experience with this plan, I’d like to hear about it and would be open to a guest post.

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  1. Is the profit sharing portion of the Solo 401k contribution only traditional? Or in other words, only the elective portion of the contribution can be designated as Roth contributions?
    Or can the entire amount be designated Roth?

  2. At the risk of asking the obvious, would this be available for someone who technically isn’t self-employed but also doesn’t have access to a 401k at work? I’m a software engineer frequently doing w2 contract work through employment agencies for traditional corporate clients and other than a Roth & traditional IRA, don’t have any other retirement account vehicles that I’m aware of.

    • No.

      You may be doing “contract work”, but if you’re paid under a W-2, in the eyes of the IRS/the law you’re not a contractor–you’re an employee. Hence, you cannot contribute your earnings from this job to a solo 401k or any other self employed retirement plan.

      • Thank you!

        Time to get paid in a 1099 basis 🙂

        • Just be careful. As I’m sure you’re aware, as an independent contractor you will have to pay self employment tax on your earnings, which means paying both halves of social security and medicare taxes, which is over 15%.

  3. So how does one need out the 54k in this scenario? Contribute $18k pre-tax, then have your own company match $36k?
    Is this available to bloggers with income from affiliate/ads?

  4. Hi- Just to follow up on the Schwab investment platform. Schwab calls it an “Individual 401k” or I401k. It’s seems as if they have a very comprehensive platform offering many stock, EFT and much more for minimal cost. I opened open one for my small counseling practice. However, my accountant and I decided that it would be best for me to contribute to a Roth version. Schwab does not offer a Roth I401k it is considered coustian if yon sign up with its partnered bank. I believe Fidelity is the same way but for both the Solo and Roth Solo 401k. I did some research and E*Trade offers both platforms and offers low cost. I like the idea of keeping my money in different places for security and organizational purposes. Plus E*Trade is well known in the industry. So it was a no brainer to close the Schwab I401k and switch to E*Trade. E*Trade makes you open a Solo 401k then the Roth version. It’s nice having both options, plus knowing they are the ones handling everything is an added bonus. It is truly hard to find a company to offer both platforms under their own roof. E*Trade is one of few surprisingly.

  5. Thank you for posting informative and helpful article.

  6. Great information. Thanks for sharing.

  7. Jonathan,

    If my husband has a small business LLC and has been doing a sep ira every year, can he just convert next year to a solo 401k?


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