One of the perks of being self-employed is the ability to self-direct your retirement savings. Self-employed individuals can open a Solo 401(k) account to access the same level of service as a company-sponsored 401(k) plan. A Solo 401(k) allows the owner-employee of the business to contribute up to $19,500 in 2021, and still make profit-sharing contributions up to $58,000 in 2021, or $64,500 if you are above 50.
You can open a Solo 401(k) account with different types of providers such as brokerages, banks, and self-directed custodians. You should compare the different Solo 401(k) providers to determine the company with the best Solo 401(k) account that meets your retirement needs. You should also compare the fees charged by each provider and the investment options available in each plan.
Where to Open a Solo 401(k) Account
There are different types of 401(k) providers, each offering a unique set of services for retirement investing. They include:
Brokerage firms
You can open a Solo 401(k) account with a brokerage firm such as Vanguard, Charles Schwab, Fidelity, and TD Ameritrade. Brokerage firms do not allow investors to self-direct the Solo 401(k) to invest in alternative investments such as real estate or tax deeds. Instead, they only allow investors to invest in equity investments such as mutual funds and stocks. Also, some brokerage firms may not allow Solo 401(k) loans.
Banks
Banks that offer Solo 401(k) do not allow self-directed investing, and they often focus primarily on traditional investments such as stocks, bonds, and mutual funds. Banks also place limitations on the plan documents, only allowing investors to invest in products they offer. Some of the banks that offer Solo 401(k) accounts include Chase Bank, Bank of America, and Wells Fargo.
Self-directed custodians
These providers allow Solo 401(k) account holders to invest in alternative investments such as tax liens, real estate, and private businesses. However, these firms charge a wide array of fees such as account set-up, holding fees, processing fees, and annual fees, which range from a few hundred dollars to over $1000. The custodian is responsible for processing the investment purchases, and you must submit investment paperwork for review and approval. The processing time can take several days or weeks, which can delay the investment purchase. Examples of self-directed custodians include Entrust, Provident Trust, and Equity Trust.
Solo 401(k) Facilitators
Solo 401(k) facilitators are self-directed custodians with checkbook control. They allow investors to invest in alternative investments such as real estate. They also offer checkbook control, which means you can purchase investments by writing a check from the Solo 401(k) account. These custodians give the investor full control as the trustee of the plan, hence allowing them to bypass holding and processing fees that would otherwise apply.
How to Open a Solo 401(k) Account
If you meet the eligibility requirements for a Solo 401(k) account, you should follow these steps to open a retirement account:
Identify a Solo 401(k) provider
Start by identifying a good Solo 401(k) provider that meets your retirement needs. You should pick an affordable provider with a strong reputation for administering Solo 401(k) plans. If you are looking for added flexibility to invest in alternative assets you should consider a self-directed custodian.
Create plan documents
Once you choose a Solo 401(k) provider, you will receive the employer kit to help you set up the Solo 401(k) account. The kit contains anywhere from 10 to 14 documents such as client agreement, privacy statement, adoption agreement, etc. You may also be required to choose your preferred investment options at this point.
Prepare employee disclosures
Although the business may not have employees, you must prepare certain disclosures about how the retirement plan works, specific information on the plan, as well as participant rights and responsibilities. You should review the disclosures to understand how the plan works and sign any required documents.
Open Solo 401(k) Account
Once you’ve obtained the required documents, you can set up the Solo 401(k) account. You should open the retirement before the tax filing date, and it should be created based on the rules provided in the plan documents. For example, if you want to contribute during the year, you can open the account any time before December 31.
Contribute to your Solo 401(k)
Once you set up the Solo 401(k) account, you can fund the account using a check, wire transfer, or rollovers from old 401(k)s. If the plan allows, you can decide to make monthly installments or one lump sum payment. You can make employee contributions and profit sharing contributions to the Solo 401(k) up to a contribution limit of $58,000 in 2021.
Solo 401(k) Provider Fees
Most Solo 401(k) providers charge a fee when opening a Solo 401(k) account. Investors may also incur additional maintenance costs, in addition to administrative fees charged for services provided in the plan. Most providers also charge mutual fund expense ratios and commissions for trading investments such as stocks and bonds.
