SOLO 401K BENEFITS:
- High contribution limits: $66,000 if you’re under 50 years of age, $73,500 if you’ll be at least 50 years of age by December 31, 2023.
- Tax deductions on contributions: Reduce your taxable income by deducting up to $66,000 ($73,500 if age 50+ for 2023).
- Roth option: In 2023, contribute up to $22,500 ($30,000 if age 50+) to a Roth solo 401k account.
- Tax-free compounding: Zero taxes when you sell assets. Your money compounds tax-free.
- Investment freedom: Invest in any asset class, including alternative assets like cryptocurrencies, NFTs, real estate, and private equity.
- Loan option: Take out a loan up to 50% of your account asset value, up to a maximum of $50,000 with no credit checks and no restrictions on how you use the money.
- Add your spouse: Double your household contribution limits for the year by adding your spouse.
- No annual tax filings: You’re only required to file taxes on your account if your assets exceed $250,000 in value.
- All business entities eligible: Business owners operating any business structure can open a solo 401k.
- Unlimited rollovers: There’s no limit on how much you can rollover from another retirement account. All retirement accounts, except a Roth IRA, can rollover funds and/or assets into a solo 401k.
Considering a solo 401k? Here’s a quick breakdown of every benefit and tax advantage a solo 401k account can give you.
High contribution limits
The solo 401k has one of the highest contribution limits of any retirement plan. In fact, it’s 3x higher than a traditional 401k and over 10x higher than a traditional or Roth IRA.
- For 2023, the solo 401k contribution limit is $66,000. If you’ll be at least 50 years of age by December 31, 2023, you can contribute an additional $7,500 in catch-up contributions, bringing your total limit to $73,500.
Comparably, a company 401k has a contribution limit of $22,500 ($30,000 if you’re at least 50) and a Roth IRA has a limit of just $6,500 ($7,500 if you’re over 50). The reason why it’s so high is because with a solo 401k, you contribute as both the employer and the employee.
Tip: If you’re using the Mega Backdoor Roth strategy with a solo 401k, you could contribute up to $66,000 into a Roth solo 401k.
Tax deductions on contributions
A solo 401k comes with a pre-tax account and a Roth account. You have full flexibility in what type of contribution you want to make. If you’re looking for the the largest tax deduction possible, you can make all your contributions as pre-tax and get a tax deduction of up to $66,000 for 2023.
If you’re 50 years of age or older, with catch-up contributions counted in, you can deduct up to $73,500 for 2023.
Most premium solo 401k plans also come with a Roth option. Instead of contributing with pre-tax income, you can choose to contribute with post-tax income into a Roth solo 401k account. While you’ll have to pay taxes on your contributions now and won’t get a tax deduction for the year, your withdrawals in retirement will be completely tax-free.
Not all solo 401k plans come with a Roth account. You can view a full list of solo 401k providers here to compare their different features.
How it works
With a solo 401k, you get to contribute as both the employer and the employee. The contribution limit is broken up into two parts: the employee side and the employer side.
While employers can only contribute pre-tax income, employees get to decide whether to contribute as pre-tax or Roth. On employee contributions, you’re allowed to contribute up to 100% of your income, up to a maximum of $22,500 for 2023. The remaining can be covered with employer contributions.
The benefit of the Roth solo 401k is that your nest egg can be withdrawn in retirement without having to pay any taxes to the IRS. On the other hand, contributions made with pre-tax income will get taxed as income when you withdraw.
It works similarly to a Roth IRA, except you have a much larger contribution limit.
When you sell assets in a solo 401k account, you pay zero taxes on the gains. Your money compounds tax-free (for both pre-tax contributions and after-tax contributions).
Tax-free compounding can significantly grow your account over the years, especially if you start contributing at an early age. And with the Roth option, you pay zero taxes on it no matter how much it grows. Whether your account grows 5x or 50,000x, it’s all yours.
When am I allowed to withdraw from a solo 401k?
You can withdraw from your solo 401k when you turn 59½ years old. Early withdrawals pay a 10% fee + income tax. You can learn more about withdrawal rules here.
Freedom to invest in any asset class
Unlike a traditional 401k account, where your investment options are limited to whatever stocks and funds your company provides, a solo 401k is self-directed. You get the freedom to choose what you want to invest in.
Along with stocks, ETFs, and mutual funds, you can use your solo 401k to invest in alternative assets like real estate, mortgage notes, precious metals, and even crypto.
If you’re accredited, you can even use your solo 401k to write small checks into a friend’s startup or fund. And the best part is, if you invested through your Roth solo 401k account, you’d pay no taxes when you take the money – even if your friend’s startup becomes the next Google and you turn your “small check” into billions.
Some solo 401k plans offer a loan option. While it’s typically not the best idea, it’s still a nice option to have.
Solo 401k loans are easier to access and gets processed a lot faster than traditional loans with other financial institutions. There are no credit checks, and no restrictions on how you use your money.
You’re allowed to borrow up to 50% of your account balance up to a maximum of $50,000. The remaining 50% of your account would act as the collateral in case you can’t pay it back. Interest rates on the loan are usually prime rate plus one or two percent. While it beats paying early withdrawal fees, solo 401k loans should only be considered as a last resort. You’re borrowing your money and paying the government the interest. And whatever you take out as a loan is money that can’t be invested with tax-free compounding in your solo 401k.
Ability to add a spouse
To be eligible for a solo 401k, you’re not allowed to have any employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods.
The only exception to this rule is your spouse. If your spouse works in your business, they can be added to your solo 401k and they would get their own contribution limits. In other words, you both get to contribute up to the maximum amount of $66,000 ($73,500 if you’re both over 50). Combined, that’s a household total of $132,000 ($147,000 if you’re both over 50).
No annual tax filings
A solo 401k is a little more complicating to set up than a SEP IRA or Roth IRA, but it’s much easier to manage. There is no annual tax filing for any account that has less than $250,000 in assets. If you do have $250,000 or more in your account, you’ll have to file a Form 5500-EZ each year.
All business entities eligible
Any business owner with no employees (other than your spouse) can open a solo 401k account, regardless of what business structure they have.
Whether you have a sole proprietorship, partnership, LLC, S corp or C corp, all entities are eligible.
Unlimited rollovers from other accounts
When you open a solo 401k, you have the option to rollover funds and/or assets from any other retirement account that already have (except from a Roth IRA). And there’s no limit on how much you can rollover. Because rollovers are treated different than contributions, you’re allowed to rollover as much as you want, and still be able to contribute up to the maximum amount allowed for the year.
Not all solo 401k plans offer every benefit
For most business owners, a solo 401k is like getting free money from the government and should look into setting one up asap. The benefits and tax advantages far outmatch any other retirement account.
But before you do, keep in mind that every solo 401k plan comes packaged differently. Many solo 401k plans don’t come with a Roth option, which is arguably the most important benefit of all. Some offer a Roth option, but don’t allow rollovers, which leaves you stuck with the majority of your retirement savings in an inferior plan. Some offer rollovers, but don’t allow full investment control, which means you can’t do cool things like buy bitcoin or invest in your friend’s hot new startup.
If you’re eligible for a solo 401k, it’s important to vet your options carefully and choose a plan that is able to offer the full benefits that you’re looking for in a solo 401k.
The Carry Solo 401k is a full-suite plan for business owners and entrepreneurs, with fully-managed account setup, tax filings, curated investments, compliance monitoring, and no AUM fees. Learn more about it here.