A Brief Guide on Setting up a Solo 401k

A Brief Guide on Setting up a Solo 401k

Oct 19, 2021, 10:23:47 AM Life and Styles


Retirement may still be a way off for most independent contractors and self-employed individuals, although there’s no time like the present to start preparing. The sooner you start to save for retirement, the more you should be able to squirrel away to enjoy during those twilight years. While you may find it a daunting process setting up Solo 401k plans for yourself and your partner, your future selves will thank you for it.

In the world of retirement plans for the self-employed, there are really only four options: Solo 401k, SEP IRA, Simple IRA, and Keogh Plan. While the two IRA’s offer their own benefits, both are more suitable for those businesses which either earn a lot of money through profit or may hire more employees at some stage. Whereas the Keogh Plan is complicated and only relevant to very high earners, such as physicians who are principals in medical practices. The Solo 401k benefits the self-employed or independent contractor who will only ever employ themselves and their spouse.

With all this in mind, here’s a brief guide on setting up Solo 401k plans for yourself and your spouse.

The Basics

Solo 401k plans are an employer-sponsored retirement plan which allow self-employed individuals to make contributions of up to $58,000 to the account (in 2021), plus an additional $6,500 for those 50 and older. Contributions are made as both the employer and employee, and can also be matched by your spouse if they’re working for your business too. Another of the Solo 401k benefits is the choice between the Traditional 401k tax advantage and the Roth 401k tax advantage.

The Traditional 401k tax advantage means that contributions reduce your income in the year they are made, and subsequently distributions in retirement are taxed as ordinary income. 

Whereas the Roth 401k tax advantage offers no initial tax break but allows distributions to be taken tax-free during retirement.

Understanding Eligibility Requirements

First thing’s first, you must be sure that you and your business are eligible for a Solo 401k plan. IRS regulations state that Solo 401k plans can only have one participant, meaning these businesses are only appropriate for self-employed individuals and small business owners with no full-time employees. The only exception is for the spouse of the account holder.

Solo 401k plans will require a plan administrator, typically referred to as an investment provider, who can ensure that all regulatory paperwork is completed on time.

Find a Provider

Often considered the most important step in the process, finding a provider will require some consideration into your individual goals, business goals, and retirement plans. People often hunt for those plans which are simple and affordable, although they may not necessarily be the best for those individuals.

You should consider these three elements when looking for a Solo 401k provider:

  • Affordability - many providers offer variable and competitive fees for their services
  • Flexibility in investment - certain providers will have restrictions on investment options, be sure to find one which aligns with your financial needs
  • Level of management - you can expect to come across varying levels of management in different providers, with some offering more hands-on management for a monthly or annual fee

Once you’ve found a provider which has the Solo 401k benefits you’re looking for, it’s time to start the paperwork.

Create Plan Documents and Disclosures

Once you’ve chosen a provider, you’ll receive an employer kit or application to set up your plan. This will contain several documents and disclosures, most of these are self-explanatory.

Plan Documents

Those which need to be completed for your provider include:

  • Adoption agreement
  • Client Agreement 
  • ERISA 404(c) plan information
  • Establishing a qualified retirement plan (QRP)
  • External transfer form
  • Participant application and designation of beneficiary
  • Privacy statement
  • QRP amendment kit
  • QRP basic plan document
  • Rates and fees

Plan Disclosures

The primary disclosures for a Solo 401k plan include:

  • Details about your plan - this is the specific information about your plan including where the accounts are being held and the available investment options.
  • Employee rights and responsibilities - this disclosure needs to include the timeline for employer and employee contributions, as well as eligibility information and any vesting schedules to be used.
  • General 401k disclosure - this is to ensure that employees understand how employer-sponsored retirement plans work, especially from a tax benefit perspective.

Open the Account

Once all of the above is completed, you’re free to open the Solo 401k account and begin making contributions. It’s considered best practice to open the account in the year that it’ll be effective, and to make your first contributions in that same year.

Published by William Smith


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