A solo 401k plan is a 401k designed for individuals. Rather than your employer sponsoring the plan for you, if you want access to the tax benefits a solo 401k gives you, you’re responsible for setting up a plan for yourself.
There are many solo 401k plan providers out there, each one offering different features depending on how much they cost. Free plans (often called prototype plans) offer only the essential features while premium plans (often called non-prototype plans) offer access to bigger tax-saving features like a Roth account, mega backdoor Roth access, loan option, and higher levels of customer support.
In this article, we’ll look at how much opening a solo 401k plan costs, and the main differences between free and paid plans.
Before we continue, download the Solo 401k Handbook. It contains every important thing you need to know about about the plan in a handy PDF:
How much does a solo 401k plan cost?
Some solo 401k plans are free, while others may cost a few hundred dollars per year to maintain. The difference between them is that free plans offer you only the essential features while premium plans offer you more of the premium features that can lead to bigger tax savings and retirement nest eggs.
To start, let’s look at the difference between free and paid plans. You can choose which one’s the better fit for you based on the features each type offers.
Free solo 401k plan features (prototype plans)
Free plans usually only offer the following features with their plans:
- Pre-tax contributions only.
- Invest in traditional assets only.
- Slower and manual steps required to open and maintain your plan.
- Minimum customer support.
If this is all that you’re looking for, then free solo 401k plans can be a convenient option without having to pay any money at all to open or maintain it. The downside is that none of the “premium” features are offered inside free plans.
Paid plan features (non-prototype plans)
Paid plans can range between a $300 to $600 per year to open and set up your plan. You get everything that you would get in a free plan in addition to a range of premium features like:
- Ability to make Roth contributions
- Ability to invest in alternative assets like crypto, real estate, and private equity
- Ability to do a mega backdoor Roth conversion
- Ability to do rollovers
- Self-directed account with checkbook control
- Higher levels of customer support
- Compliance monitoring
It’s important to note though that every paid plan provider is different in what they offer. Most paid providers will provide things like a Roth option, ability to do rollovers, and access to alternative investments, but only a few providers offer additional features like higher levels of customer support, mega backdoor Roth conversions, and access to wider ranges of alternative investments.
If you’re looking for a premium solo 401k plan experience, check out the Carry Solo 401k, which offers all of the above features. One of the biggest advantages of using Carry is that there are zero AUM fees whether you invest directly into traditional assets or through a no-fee robo-advisor.
Is a paid solo 401k plan worth it?
To determine whether it makes sense to choose a paid plan over a free plan, let’s look at the different features a paid plan offers you.
Paid plan feature #1: Ability to make Roth contributions
Solo 401k contributions are broken down into two different types: employer contributions and employee contributions. With a regular 401k plan, you only get to contribute as the employee. But with a solo 401k, because you’re your own employer, you get to make contributions on both sides, leading to a much higher contribution possibilities.
The total solo 401k contribution limit is $66,000 for 2023 if you’re under 50 years of age, and $73,500 if you’re 50 years of age or older. However each side (employee vs employer) has different rules and limits.
- Can either be traditional pre-tax or Roth post-tax, or both.
- Has a limit of $22,500 ($30,000 if age 50+) in 2023.
- Can only be traditional pre-tax. Employers cannot contribute to a Roth account.
- Can contribute up to 25% of compensation if the business is incorporated, and approximately 20% if the business is not incorporated.
Free plans and paid plans both allow you to make both types of contributions. However, most free plans do give you the option to make your employee contributions into a Roth account and only allow pre-tax contributions.
The difference between Roth and pre-tax
- With a pre-tax contribution, you’re choosing to get a tax break now rather than later, since contributions to a pre-tax account get deducted from your taxable income. For example, if you made $60,000 this year and choose to contribute $20,000 to a pre-tax account, your new taxable income is now $40,000. The downside is that when you make withdrawals from your account in retirement, it’ll be taxed as regular income.
- With a post-tax contribution, you’re choosing to pay taxes on your income now in return for tax-free withdrawals in retirement. If you made $60,000 this year and choose to contribute $20,000 to a Roth account, your taxable income is still the full $60,000. You contribute to your account with money you’ve already paid taxes on. The upside is that when you make withdrawals in retirement, it’s completely tax-free no matter how large your investments have grown.
While some free plans do offer a Roth option, most only offer a pre-tax solo 401k account. All paid plans offer both pre-tax and Roth accounts.
Paid plan feature #2: Ability to invest in alternative assets
With a free solo 401k, your investment options are limited to traditional assets like stocks, bonds, mutual funds, and ETFs. These options are also available in all paid plans as well, but you also get the ability to invest in alternative assets like cryptocurrencies, investment properties (to earn rental income), and private equity (write checks into startups).
Investing in alternative assets like startups can be riskier but the payoff is that it can give a sizeable tax-free nest egg in retirement, similar to how Peter Thiel turned $2,800 into $5 billion investing in PayPal, Facebook, and Palantir inside his Roth retirement account. Because the investments were made inside a Roth retirement account, the entire amount after the considerable gains is able to be withdrawn completely tax-free.
Paid plan feature #3: Ability to do a mega backdoor conversion
If you love the idea of having as much in your Roth account as possible, there’s a way to get even more money into your Roth solo 401k than is typically allowed.
Normally, you’re only allowed to put in up to $22,500 ($30,000 if age 50+) into your Roth solo 401k for 2023. But you can also do what’s called a mega backdoor solo 401k conversion. Doing so would allow you to put in up to the entire solo 401k contribution limit of $66,000 ($73,500 if age 50+) into your Roth solo 401k for 2023.
The mega backdoor conversion is not available with any free plan, and many paid plans do not even offer them. If you’re interested in putting in as much money into your Roth solo 401k plan as possible, definitely find a plan that offers this feature (like the Carry Solo 401k).
Paid plan feature #4: Ability to rollover assets from any retirement account
The IRS allows you to rollover assets from any retirement (except a Roth IRA) into a solo 401k plan. That essentially means that if you qualify for a solo 401k, you can transfer the funds from other accounts with less features and more restrictions and immediately get access to all the solo 401k features with the same funds.
For example, let’s say that you have $50,000 sitting in an old 401k. With a 401k, your investment options are typically restricted to a list of around 8 to 12 different mutual funds that were pre-selected by your employer when they set up your plan. If you open a paid solo 401k plan, you can immediately transfer the $50,000 into your solo 401k and start investing those same assets into virtually any asset class, including alternative assets.
Most free plans either don’t allow rollovers, or only allow rollovers from certain retirement accounts. With paid plans, rollovers from all eligible retirement plans are supported.
Also read: How Solo 401k Rollovers Work
Paid plan feature #5: Online experience
With free plans, a lot of the account creation process is completed through printing, signing, and mailing dozens or even hundreds of paper documents. If you want to make a contribution into your account, some free plans still don’t accept bank deposits and require that you mail in a check.
With most paid plans, the account creation process and contributions are done entirely online with no paperwork or snail mail required. For example, with the Carry Solo 401k Plan, creating an account is done entirely online with no paperwork required, and can be done in under 10 minutes. You can make contributions online through direct deposits or perform rollovers from other retirement accounts with just a few clicks. You can even do the mega backdoor solo 401k conversion entirely from within your user dashboard.
Paid plan feature #6: Higher levels of customer support
A solo 401k can be more complex to set up and maintain. It can require more paperwork to set up your account, and you’re responsible for making the right contribution amounts and ensuring your account is in compliance each year. If you make mistakes and owe penalties, you’re responsible for correcting them as well.
Because of this, levels of customer support is one of the biggest differences between free and paid plans. Free plans offer little to no support on account compliance or administration. You’re entirely responsible for learning about and avoiding any actions within your account. With paid plans, the price you pay annually also includes higher levels of support that help make sure your account is in compliance and your records are properly maintained.
For example, with the Carry Solo 401k, all of your account documents can be found within your user dashboard. You can get help from customer service for moving money between accounts, making contributions, performing mega backdoor conversions, and even filing your 5500-EZ tax forms at the end of each tax year.
Paid plan feature #7: Ability to take out a solo 401k loan
Some paid plan providers offer the ability to take out a solo 401k loan. You can borrow up to 50% of your account value, up to a maximum of $50,000. Interest rate is usually prime rate plus one or two percent, and you get 5 years to repay the loan (can be up to 15 years, depending on the provider, if the funds are being used to purchase a primary residence).
A solo 401k is basically you borrowing money from your own account, and all interest payments go straight back into your account. Because you’re not borrowing from a third party creditor, there are no credit checks, late payments don’t affect your credit score, and you can receive the funds fairly quickly to use as you wish.
Do all paid plans offer these paid plan features?
No, every paid plan provider offers different features. Sign up to the provider that offers the best features that you’re looking for.
What you still get with a free plan
So now you know everything that you get with a paid plan. Here’s what you still get with a free plan (note: these are also all available with paid plans as well).
- High contribution limits: You can contribute up to $66,000 into a solo 401k for 2023 if you’re under 50 years of age, and up to $73,500 if you’re 50 years of age or older.
- Ability to get a tax deduction: With a solo 401k plan, you can get a tax deduction of up to $66,000 ($73,500 if age 50+) for 2023. To do this, you would have to make the entire $66,000 contribution into your pre-tax solo 401k plan.
- Tax-free compounding: Any profits you make from your investments can be reinvested tax-free, without paying any capital gains tax allowing you to compound your money and build wealth faster.
- Ability to invest in traditional assets: While you can’t invest in alternative assets, you can still make investments into things like stocks, bonds, mutual funds, and ETFs.
- All business entities are eligible: There’s no special rule that you must be a sole proprietorship or a corporation to qualify. All business structures are eligible to open a plan. You can even open a plan if you earn a W-2 income from a day job, as long as you have separate business or self-employment income that you want to contribute to a solo 401k.
- All income levels are eligible: There are no minimum income requirements with any solo 401k plan. You can open a solo 401k whether you make a few hundred dollars per month or own a million dollar business.
For a list of all solo 401k plan benefits (free and paid), also read: Solo 401k Benefits & Tax Advantages: Is A Solo 401k Worth It?
Paid plan vs free plan
To summarize the key differences between free and paid solo 401k plans, here’s an overview of the features offered by the Carry Solo 401k compared with three of the biggest free plan providers.
|Checkbook control option *||✅||❌||❌||❌|
|Making contributions||Online||Online||Mail physical check||Mail physical check|
|Mega backdoor Roth||✅||❌||❌||❌|
|Solo 401k Loan||✅||❌||❌||❌|
|Invest in traditional assets*||✅||Only Vanguard mutual funds||✅||✅|
|Invest in alternative assets*||✅||❌||❌||❌|
|Real estate investments*||✅||❌||❌||❌|
|Private equity investments*||✅||❌||❌||❌|
|Zero AUM fees||✅||❌||❌||❌|
|Price||$299/year, zero AUM fees*||Free to set up, $20/fund per year.||Free to set up||Free to set up|
Paid plan provider costs compared
|My Solo 401k||$525 first fee + $125 annual fee|
|Nabers||$588/year – ($49/month)|
|Rocket Dollar||Silver Plan: $360 set up fee + $15/month|
Gold Plan: $600 set up fee + $30/month
Does a paid solo 401k plan make sense for me?
A paid plan can cost money to set up and maintain, but gives you access to premium features that could save you more in taxes immediately. If you’re not looking for any of the premium features listed here, then it may make more sense to go with a free plan. While they can be more time-consuming to set up, you only need to go through the application once and the plan is fairly easy to maintain year to year, as long as you’re in compliance with IRS rules.
On the other hand, access to more investment options, the ability to contribute to a Roth account, or even do a mega backdoor Roth conversion are features that can save you considerably more money on taxes immediately after you open a paid plan. This is especially the case if you have assets in other retirement plans that can be rolled over to your solo 401k.
In the end, it all depends on what makes the most sense for your current income levels, financial goals, and money moves you’re looking to make. If you’re unsure whether a paid plan makes sense for you, contact us at firstname.lastname@example.org and we can help assess your current situation and offer you the best advice based on your savings and retirement goals.
Also read: Solo 401k Vs SEP IRA