The solo 401(k) is an attractive option for self-employed people looking for a retirement account. The fact that these accounts are attractive to a specific group—self-employed people earning enough to want to better manage taxable income—has led to an uneven offering compared to more broadly applicable account types. While some brokers like Fidelity, Schwab, and TD Ameritrade treat solo 401(k)s as just another account, their excellent investment platforms can make up for the limited account features. Then you have E*TRADE, which is leaning into more of the features of the solo 401(k) with the Roth and traditional contribution options as well as the flexibility of an actively managed or digitally managed account. Finally, you have Vanguard and Rocket Dollar at opposite ends. Vanguard limits your investments to 123 well-managed funds while Rocket Dollar opens the door to any investment you can purchase with a check.
A good rule of thumb for choosing between these solo 401(k) companies is to decide how much time you want to spend actively managing your business versus how much time you want to spend actively managing your portfolio. If you have the time to commit, the more active options including Fidelity, TD Ameritrade, E*TRADE, Schwab, and, of course, Rocket Dollar will give you more control and more options. If you want to leave the portfolio to run itself as much as possible, then Schwab, E*TRADE, and Vanguard can provide a more passive approach. After that, it is down to figuring out how you want to structure the solo 401(k) and whether or not Roth contributions and 401(k) loans are important to you. When in doubt, consulting a tax professional about your specific situation is highly recommended.
What Is a Solo 401(k)?
Solo 401(k)s are specifically designed for business owners who do not have any employees (with the potential exception of a spouse). Sole proprietorships are the most obvious fit for this plan, but structured businesses like limited liability corporations and partnerships can be eligible as long as they meet the IRS requirements. A solo 401(k) allows you to contribute $22,500 in 2023 as an employee (those over 50 can contribute another $7,500 as a catch up). This can be done as a traditional contribution for the tax deduction or, if available, Roth contributions to give you tax-free distributions in the future. Solo 401(k)s are the only way to make Roth contributions for some high earners as Roth IRAs have income caps.
For the employer portion of a solo 401(k), you can contribute up to 25% of compensation to an annual maximum of $66,000 for 2023 ($73,500 if over 50). The employer contributions are tax deductible for your business, reducing the tax burden in the current year regardless of how the employee portion is structured.
It is important to note that the solo 401(k) is not the only option for the self-employed. The simplified employee pension IRA and SIMPLE IRA also apply and may be a better choice if you intend to hire employees at some point in the future.
Who Should Get a Solo 401(k)?
Solo 401(k)s are an excellent choice for business owners who do not intend to employ anyone beyond a spouse. Going the solo 401(k) route allows you to make more contributions overall and diversify your tax situation with some of your retirement savings in a Roth vehicle in addition to the traditional 401(k).
Although the solo 401(k) works best for high earners who can maximize contributions to reduce their business and personal taxes, it can also play a key role for those with a side hustle. You can contribute 100% of your side income into a solo 401(k) up to the limit of $22,500. It is important to note that the limit is by individual, so anything you are contributing to a 401(k) at the day job comes out of that limit. In this arrangement, the solo 401(k) acts as a bonus retirement account.
Can I Manage My Own Solo 401(k)?
You can absolutely manage your own solo 401(k). Unlike day trading, retirement investing is more about the initial investment mix, patience, and regular maintenance. The educational resources available to investors specifically looking to invest for retirement are too numerous to count. More importantly, all the companies reviewed above—with the exception of Rocket Dollar—offer you the analysis tools and ongoing support to create and maintain a well diversified retirement portfolio.
At a minimum, you will find a suggested portfolio mix based on your stated timeframe and risk tolerance and a tool to run a checkup type analysis on your current holdings. Even the dreaded rebalancing of a portfolio is incredibly simple now thanks to improvements in brokerage platforms. If you don’t want to manage your solo 401(k) for whatever reason. however, you can use a robo-advisor like E*TRADE’s Core Portfolios to do the work for you.
Solo 401(k)s are important investment vehicles that allow self-employed individuals and business owners an opportunity to save for retirement. We reviewed several providers of solo 401(k) accounts based on pricing, investment options, account features, trading platforms, and the ability to make Roth contributions or take out a 401(k) loan to determine our list of the top platforms in the industry.
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