A 401k is an employer-sponsored retirement plan. Without an employer, you cannot participate in a traditional company 401k plan. However, there are some strong alternatives that offer even better benefits and tax-advantages than a normal 401k.
Perhaps you’re already employed, but your company just doesn’t have a 401k plan that they offer to employees. 401k plan are expensive to offer and administer, and employers aren’t obligated to offer a 401k plan. If your company doesn’t offer a 401k, it’s likely that they just can’t afford to at the moment.
If an employer doesn’t offer a retirement plan, what might be another way to save for retirement?
If you don’t receive a 401k at work, here’s how to open a 401k plan without an employer.
You can open a Solo 401k without an employer
The solo 401k is a 401k plan for self-employed individuals and business owners with no employees. You can open a solo 401k without an employer because you are the employer. As the owner of your own business, you act as the employer and the employee of the plan, and get to make contributions on both sides.
To qualify for the solo 401k, you only need to meet two eligibility rules:
- You must have self-employed income.
- You must not have any employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods (except your spouse).
Any business entity is eligible, whether you operate as a sole proprietorship, partnership, LLC, C corp, or S corp.
There are no income limits. You qualify whether you make six-figures per year, or just make a few hundred dollars on weekends.
Why a solo 401k is better than an employer-sponsored 401k
A solo 401k isn’t just better than a typical 401k. It offers more benefits and tax-advantages than any other retirement plan.
Higher contribution limits
The solo 401k has the same contribution limits as a traditional 401k plan. However, because you get to contribute as both the employer and employee, you get to contribute more every year.
The contribution limit of a solo 401k is $61,000 ($67,500 if age 50+) in 2022 and $66,000 ($73,500 if age 50+) in 2023.
- As an employee, you’re allowed to contribute up to 100% of your compensation, up to a maximum of $20,500. If you’re over 50, you can contribute up to $27,000.
- As an employer, you’re allowed to contribute up to 25% of compensation if your business is incorporated, or up to 20% if your business is NOT incorporated. You can use up to a maximum of $305,000 of compensation to factor your contribution limit.
The total employee and employer contributions must not exceed $61,000, or $67,500 if you’re over 50 years old.
More investment options
With a regular 401k, you don’t have many options in what you can invest in through your retirement account. Usually, your choices are limited to a small number of mutual funds.
With a solo 401k, you can invest in almost any asset class, including individual stocks, real estate, private equity, and crypto and NFTs. The only things you cannot invest in are collectibles, S corporation stock, and life insurance.
Many employers do not offer Roth 401k accounts with their 401k plan.
A solo 401k comes with two different accounts: A traditional solo 401k and a Roth solo 401k. You’re not bound by whatever decision your employer makes. If you want a Roth option, you just need to find a solo 401k plan provider who offers a Roth option.
The main difference between the two accounts is WHEN they get taxed.
- Contributions to a pre-tax solo 401k account are made with pre-tax dollars, and are deducted from your taxable income for the year. However, distributions in retirement get taxed as regular income. You save on taxes today, but owe taxes in retirement.
- Contributions to a Roth solo 401k are made with after-tax dollars, and get no immediate tax breaks. However, distributions in retirement are completely tax free. You pay taxes today, but don’t owe any taxes in retirement.
Employee and employer contributions can both go towards a pre-tax solo 401k. That gives you a potential tax deduction of $61,000 in 2022 if you make all your contributions into a pre-tax account. If you’re over the age of 50, the potential tax deduction is up to $67,500.
However, only employees can contribute to a Roth solo 401k. Employers can only contribute to a pre-tax solo 401k, and are not allowed to contribute to a Roth account.
With a solo 401k, you’re allowed to take a loan from your own account.
You can borrow up to 50% of your plan value, up to a maximum of $50,000. You’ll have 5 years to pay back the loan, or 15 years if you use the money to purchase a primary residence.
Early withdrawals from a solo 401k (or a normal 401k) before the age of 59½ get hit with a 10% penalty plus income taxes on the amount withdrawn. With a solo 401k loan, you only have to pay interest, which is usually Prime Rate plus one or two percent.
To be able to take out a solo 401k loan, your plan provider must provide the option within the plan. Not all solo 401k plan providers offer a loan option. Generally, it’s not a great idea to take out a solo 401k loan since the money would normally be invested and earning income with tax-free compounding.
How to open a solo 401k without an employer
Opening a solo 401k is easy and you don’t need an employer to sign off on one. You simply need to get an Employer Identification Number (EIN) if you don’t already have one for your business, and sign up with a plan provider of your choosing.
Steps to opening a solo 401k (no employer required):
- Choose a plan provider
- Get an Employer Identification Number (EIN)
- Fill out an application and plan adoption agreement
- Get an EIN for your solo 401k trust
- Open bank accounts for your solo 401k trust
- Fund your solo 401k
- Start investing
Make sure that you choose a solo 401k plan provider that offers all the benefits that you’re looking for. Every plan provider offers a different solo 401k plan package and provides different levels of support. If you want a fully managed solo 401k plan, with a Roth account and an integrated investment platform, learn more about the Carry Solo 401k.
Note: You can open a solo 401k even if you have an employer and receive a company 401k. If you have a side hustle that makes money, you can be eligible for a solo 401k as long as you have no employees. You are allowed to contribute to both a solo 401k and a 401k at work. However, keep in mind that your employee contributions towards both accounts must not exceed the employee contribution limit of $20,500 ($27,000 if age 50+) in 2022 and $22,500 ($30,000 if age 50+) in 2023.
Other retirement account options you can open without an employer
The solo 401k is the only 401k plan you can open without an employer. However, you can still open individual retirement accounts, also known as IRAs.
Traditional IRA and Roth IRA
You can think of a traditional IRA as similar to a traditional 401k, and a Roth IRA as similar to a Roth 401k.
With a traditional IRA, you fund your account with pre-tax dollars, get a tax deduction, but pay taxes when you make qualified distributions in retirement.
With a Roth IRA, you fund your account with after-tax dollars, get no tax deduction, but pay zero taxes when you make qualified distributions in retirement.
A traditional and Roth IRA can be opened if you have any taxable income. There are no income limits, and no requirements to have an employer.
Unfortunately, the contribution limits are much lower than a 401k.
The contribution limit for a traditional and Roth IRA is $6,000 ($7,000 if age 50+) in 2022 and $6,500 ($7,500 if age 50+) in 2023.
A SEP IRA (Simplified Employee Pension) is for business owners with a few full-time employees. It’s usually a good alternative if you don’t qualify for a solo 401k because you have one or more full-time W-2 employees.
Remember that a solo 401k requires that you have no employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods. If you do end up hiring employees, moving to a SEP IRA could be the next best choice.
It has the same contribution limits as a solo 401k and regular 401k. The contribution limit for a SEP IRA is $61,000 ($67,500 if age 50+) in 2022 and $66,000 ($73,500 if age 50+) in 2023.
However, you can only contribute employer earnings to a SEP IRA. You cannot contribute as an employee. Therefore, you have no Roth option. Employer contributions are calculated with 25% of your compensation. Therefore, it takes more income to max out a SEP IRA than a solo 401k.
Equal percentage contributions for employees
A SEP IRA has an additional rule. If you contribute to your own SEP IRA, you must make equal percentage contributions to every employee in your business. For instance, if you contribute 10% of your income to your SEP IRA this year, you’ll also have to contribute 10% of every employee’s income to their SEP IRAs. If you have dozens of employees, a SEP IRA can be an expensive option.
If an employer doesn’t offer a retirement plan, what might be another way to save for retirement?
Yes, you can open a solo 401k plan on your own. This is the only 401k plan that doesn’t require an employer. However, you need to be a self-employed individual or business owner with no employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods.
A solo 401k is a 401k plan for the self-employed with no employees. As long as you have any sort of self-employment income, you’re eligible. There are no income limits, all business structures are accepted, and there’s no requirement for an employer since you’re your own employer in your business.
A solo 401k is the only 401k plan that you can open without an employer. If you have employees in your business, you can look into a SEP IRA, which has the same contribution limits as a solo 401k and regular 401k plan, but only allows employer contributions.
If you’re not self-employed, you can also open a traditional or Roth IRA as long as you have any earned income. However, contribution limits are much smaller than a regular 401k or solo 401k plan.