A solo 401(k) is an employer-sponsored retirement plan that allows self-employed individuals to contribute up to $57,000 before taxes, including $19,500 of employee salary deferrals. Setting up a solo 401(k) requires just six steps that hinge on picking a great provider but having only one participant makes it possible to complete in just a matter of days.
ShareBuilder 401k is an experienced 401(k) provider that allows entrepreneurs to maximize their retirement savings at an affordable price. Clients get access to a low-expense, diverse, high-quality fund line-up and an easy to use online portal. ShareBuilder 401k has a one-time setup fee of $150.
In order to set up your own solo 401(k), you must complete six basic steps:
1. Understand the Eligibility Requirements for a Solo 401(k)
A business with one participant and no other eligible employees can open a solo 401(k). Generally, the only participant in a solo 401(k) is the business owner and potentially their spouse. Individual 401(k)s are not available if you have full-time employees who would be eligible for a 401(k).
While a solo 401(k) still needs a plan administrator and involves completing several forms to open the account, it is relatively easy to open because you’re the only participant. Many of the costs associated are competitive to other investment options, although a solo 401(k) gives you much more investment flexibility. Plus, these plans are much easier to administer than a traditional 401(k), and your provider will be there to help you set up and administer the plan.
Who Can Benefit From a Solo 401(k)
Because IRS regulations say solo 401(k)s can only have one participant, these plans are only appropriate for self-employed individuals and small business owners who have no full-time employees.
There is another retirement plan, the simplified employee pension individual retirement account (SEP-IRA), that is often used among sole proprietors to save for retirement. While both plans allow you to contribute a maximum of $57,000 each year, the SEP-IRA only allows you to contribute up to 20% of your income. For those making less money but wanting to save more, the solo 401(k) allows you to contribute up to 100% of your income.
Solo 401(k)s can also be better than alternatives (especially SEP IRAs) if you think you may hire employees in the future. This is because if you have a SEP-IRA and hire employees, you must make contributions for all of your employees whenever you make contributions for yourself. If you have a solo 401(k) and you hire employees, you can convert your plan to a traditional 401(k) easily to accommodate new participants.
2. Identify a Solo 401(k) Provider
The next step, and possibly the most important step to setting up a solo 401(k), is to identify a good provider—known as the plan administrator. Be sure to consider reputable, low-cost companies that can meet your specific needs. If you want added flexibility to invest in assets like real estate, there are alternative providers who can help you establish a self-directed 401(k) account.
Business owners who want a solo 401(k) have unique concerns that differ from companies wanting to use a traditional 401(k), SEP IRA, or another alternative. These plans are all about your future individual goals and future business plans. You’ll need a provider that you can afford but also one that has a strong reputation for administering solo 401(k)s.
When you start looking for a solo 401(k) provider, it’s important to consider these three things:
- Cost-effectiveness: Fortunately, for many business owners, there are solo 401(k) plans with manageable fees through experienced plan administrators.
- Good reputation: You can choose a large national provider or a smaller boutique to administer the plan. However, be sure they are registered properly to establish and maintain a solo 401(k) plan on your behalf.
- Adequate investment flexibility: Investors have different investment strategies and goals. Be sure to choose a provider that will give you access to the investment options you want.
If you already have investment accounts or an IRA somewhere, you can ask your advisor if the company works with solo 401(k)s. There is much be said by working with an institution that you already trust and the convenience of having all your funds in one place. If your advisor is unable to help, make sure you choose a reputable company.
Most people looking to set up a solo 401(k) only need a simple, straightforward plan with low costs. If you know that you specifically want to invest in alternative assets, look for providers that offer self-directed accounts or checkbook control. While this method of investing retirement plans is intriguing to many, realize that it has a lot more regulations to follow to remain in compliance.
If real estate is an especially attractive investment, be sure to check out our article on using a Self-Directed Solo 401(k) for Real Estate Investing.
Top Solo 401(k) Providers
A top solo 401(k0 provider can explain the process effectively, get you started quickly, and help you maintain compliance while investing in the types of investments you want. We’ve researched the best solo 401(k) providers in the market today and have narrowed them down to a few of the most reputable and high-performing companies. You can read an overview of some of the best providers below.
For business owners that want to set up their solo 401(k) from the comfort of their own desk, ShareBuilder 401k offers a completely online experience. ShareBuilder 401k is focused on providing low-cost 401(k) plans to self-employed individuals and small businesses. Using ShareBuilder 401k, small business owners can be assured that they are getting low-cost, best-in-class investment options.
While ShareBuilder 401k offers solo 401(k) plans, the company specializes in plans for businesses with between six and 10 employees. The ability to convert your solo 401(k) into a traditional 401(k) plan for you and your future employees makes ShareBuilder 401k ideal for a business that thinks it will be growing shortly.
Vanguard is the largest mutual fund company globally, with more than 100 low-cost mutual funds and more than $4.5 trillion in assets under management. In addition to its line of mutual funds, target date funds, and exchange-traded funds (ETFs), Vanguard also offers simple, cost-effective retirement accounts, including solo 401(k)s.
Although Vanguard is extremely cost-effective and has a great reputation, it doesn’t offer additional services that might be helpful to a small business owner. There is no business banking or individual investment guidance, and it also doesn’t allow account holders to borrow against solo 401(k) assets. However, Vanguard is an ideal provider if you want to focus on passive investing in low-cost, professionally managed mutual funds.
Charles Schwab is a huge financial company that offers a vast array of services. It has its own line of mutual funds and ETFs, plus securities brokerage services, individual investment advice, business banking, and other services. It doesn’t charge account maintenance fees and waives trading commissions on its own mutual funds and ETFs.
Schwab is a good choice if you could benefit from additional services like business banking outside of your solo 401(k). You’ll have quality investment options while conveniently keeping other financial accounts in one place.
MySolo401k is a provider that specializes in solo 401(k)s for self-employed business owners. Because it specializes in niche investments and has additional costs, MySolo401k is best for sophisticated investors who know what they’re doing and want to invest specifically in alternative assets like real estate.
If you have a solo 401(k) through MySolo401k, you will have access to many add-on services, including lending facilities, as well as tremendous flexibility among investment options through a self-directed account. However, these additional investment options come with added costs.
3. Create Plan Documents
After you select a provider, you will receive a package of documents referred to as an “employer kit” or “employer application” to set up a solo 401(k). You can expect the package to contain anywhere from 10 to 14 documents, including the required disclosures. Most of the forms are self-explanatory.
Documents that need to be completed for your provider include:
- Client agreement
- External transfer form
- Participant application and designation of beneficiary
- Establishing a qualified retirement plan (QRP)
- Section 408(b)(2) disclosure
- Rates and fees
- QRP amendment kit
- ERISA 404(c) plan information
- Summary cash balance form
- Privacy statement
- QRP basic plan document
- Adoption agreement
In addition to personal information and information on your business, this paperwork may include certain items that would go on IRS Form 5500, but you won’t need to file this form until you have $250,000 in your account or have additional plan participants. You’ll need to make elections on your investment options during this phase of the process, but they can be changed later.
4. Prepare Employee Disclosures
To the IRS and other regulators, a solo 401(k) is like a traditional 401(k) with only one participant. So, even though you don’t have employees who can participate in your solo 401(k), you will need to prepare disclosures that contain certain information on the plan and the benefits of tax-free savings. All disclosures should have been sent with your solo 401(k) kit from your plan provider.
Go through the disclosures to ensure you understand how the plan works, what you need to do to remain compliant, and sign any documents necessary.
Should you later convert your solo 401(k) to a traditional 401(k) with more participants, you’ll need to give each eligible employee the same set of disclosures in an enrollment package.
The primary disclosures for a solo 401(k) plan include:
- General 401(k) disclosure: The IRS wants to make sure employees understand how employer-sponsored retirement plans work like tax benefits.
- Details about your plan: The specific information on your plan, including where accounts are being held and the available investment options.
- Employee rights and responsibilities: Employee disclosure needs to include information about available matching―even though you won’t have formal matching while you’re the only participant―timeline for employer contributions, eligibility information, and any vesting schedules you want to use.
5. Open an Account With Your Provider
Now that you’ve chosen your provider and obtained all required documents and disclosures, it’s time to open the solo 401(k). This account should be formed any time prior to your tax-filing deadline, including any extensions, and needs to be formed in accordance with any guidelines in your plan documents.
Technically, you’re allowed to set up a solo 401(k) account after the year ends and make prior-year contributions in a similar way that you fund an IRA. However, it’s typically better to set up a new account in the same year that it will be effective and make your first contributions in the same year so that you don’t raise any red flags with the IRS.
6. Make Contributions to Your Solo 401(k)
Once all the paperwork is completed, and the disclosures are reviewed, it’s time to fund your account. Most providers will accept a check, wire transfer, or electronic funds transfer to fund the solo 401(k). It’s up to you whether you want to make monthly installments or fund it completely in one lump-sum payment. Remember that the contribution limit is $57,000, but only $19,500 can be from salary withdrawals. For the remainder, you’ll want to consult with your tax advisor to place the proper funding in the solo 401(k).
Penalties for over contributions are applied in the year that the contribution is made, and when the money is distributed, so you want to get the contribution correct. Profit sharing is up to 25% of your compensation.
Once your account reaches $250,000 in assets, you will have new requirements, including filing Form 5500. If you ever hire employees who become eligible for your plan, you will need to make adjustments to accommodate these new participants.
Solo 401(k) Costs
Because solo 401(k)s have one participant, there are few administration requirements, but your provider will help you through each of the ones that are required for a fee. Most providers charge custody fees plus mutual fund expense ratios and commissions for trading individual stocks, bonds, or ETFs. You may also pay fees per fund you use or other fees to an alternative provider if you invest in things like real estate.
Sample Solo 401(k) Costs
Type of Fee
$25 to $50 annually
$5 to $25 per trade
Expense Ratios (Mutual Funds/ETFs)
0.035% to 1.5% annually
Administrative Charges (Self-directed 401(k))
$200 to $2,000 annually
Solo 401(k) Pros and Cons
Easy to administer
Higher compliance requirements than IRAs
Higher contribution limits than IRA
Potentially higher admin costs
Potential to borrow from 401(k)
May need Form 5500 for accounts over $250,000
Lower costs than traditional 401(k)
Must offer to newly hired employees and convert to traditional 401(k)
A solo 401(k) is a great option for small business owners with no full-time employees. It offers many benefits, including higher contribution limits than traditional IRAs and diverse investment options from which to choose. With the right provider, the solo 401(k) is easy to set up and maintain.