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Home » 401K, Retire, Retirement Planning, Roth 401K

Solo 401k Basics for Self-Employment Income

Last updated by on 2 Comments

This is the second of a multi-part series on retirement accounts for self-employment income.

I previously gave a rundown of SEP IRA’s. In this post, I’ll cover the mighty Solo 401k. And up next: the SIMPLE IRA.

Those who have or plan to have self-employment income should find this relevant. If you don’t fall in to those categories, you can let curiosity be your guide.

What is a Solo 401k?

solo 401kThe Solo 401k has a ridiculous amount of alternative names. It is also commonly referred to as an Individual 401k, Solo-k, Self-Employed 401k, Uni-k, and the One-Participant 401k, among others. The IRS officially refers to Solo 401k’s as “One-Participant 401k’s“, but I haven’t heard anyone use that terminology, so we’ll stick to Solo 401k’s here.

Despite the confusing number of nicknames, they all refer to the same thing: a 401k plan covering a self-employed individual (an income generating business owner with no employees), or that person and his or her spouse.

There are a few key differences between the employer 401k’s most of us are used to and Solo 401k’s, which we’ll cover in a bit. Outside of those differences, Solo 401k’s very closely resemble Traditional 401k’s and Roth 401k’s we are already familiar with.

What are the Qualifications to Create & Contribute to a Solo 401k?

Unlike the SEP IRA, the Solo 401k has no age or income restrictions. In order to be able to contribute to one, your contributions must come from self-employment income in that year.

As with the SEP IRA, you do not need to be full-time self-employed in order to be eligible. You could be part-time self-employed or earn a side income from a secondary job. Having a Traditional 401k through another employer does not exclude you from being able to start and maintain a separate Solo 401k.

You also do not need to have a registered corporation (LLC, S-Corp, etc.) in order to be eligible.

The other qualifier is that you cannot employ any full-time employees, outside of the exception of a spouse. Full-time employees are considered to be those that work an average of at least 30 hours per week for his/her employer.

Solo 401k Contributions

The defining difference between standard employer 401k plans and Solo 401k’s is that you can make contributions as an employee (similar to standard 401k’s) and as an employer (similar to SEP IRA’s).

As a result, you can contribute much more of your self-employment income to a Solo 401k than you can to a SEP IRA or SIMPLE IRA.

Solo 401k Contribution Limits

The great thing about Solo 401k’s is the ability to contribute as both an employer and an employee and how it can potentially boost your retirement savings to another level.

To recap, the maximum 401k contributions for employees is $17,500 for both 2013 and 2014. Individuals age 50 or older can make an additional $5,500 catch-up contribution. Contributions can’t exceed 100% of compensation. This maximum is a combined maximum between any other employer 401k and your Solo 401k. For example, if you are under age 50 and have contributed $10,000 to your day job employer sponsored 401k, you can then only contribute $7,500 ($17,500 – $10,000) to your Solo 401k as an employee.

Maximum employer + employee contributions (per eligible employee) are the lesser of $52,000/$57,500 (catch-up) for 2014 and $51,000/$56,500 (catch-up) for 2013.

The maximum tax deductible contribution as an employer is 25% of post-contribution net earnings (same as the SEP IRA). For more on this, check out the IRS rate table for self-employed contributions and my previous post on SEP IRA’s.

Solo 401k Contribution Deadlines

There are essentially two different deadlines for Solo 401k contributions.

The first applies to employee contributions. These have the same end of calendar year deadline as other 401k’s.

Non-corporation employer contributions are generally due by the tax deadline for the previous calendar year (typically April 15). Extensions are possible.

If a contribution comes between January 1st and the tax deadline, you can characterize it for the previous or the present calendar year. Contributions for a calendar year must be made prior to filing your taxes for that year.

Solo 401k Contribution Calculators

If you want to double-check your math on how much you can contribute to Solo 401k’s and compare to other retirement accounts, here are a few Solo 401K contribution calculators to play with:

Can you Contribute to Both an Employer 401k and a Solo 401k?

If you have employers, outside of yourself, you can contribute to both your employer’s 401k and make contributions to your own Solo 401k as an employer and an employee.

Are there Roth Solo 401k’s?

Yes. Contributions to Solo 401k’s can be pre (Traditional) or post (Roth) tax, unlike SEP IRA’s, which are pre-tax only.

Note that as with employer Roth 401k’s, only employee contributions can be after-tax Roth contributions. All employer contributions are pre-tax.

Can you Roll a Solo 401k Into an IRA?

Yes. You can roll a Solo 401k in to a Traditional IRA, SEP IRA, or even a Roth IRA – just as you can a Traditional 401k.

You can even roll a Traditional or Roth 401k in to a Solo 401k or Roth Solo 401k.

As with all traditional-to-Roth retirement plan rollovers, any amount you roll over is considered taxable income in the year that you roll it over.

Where Can you Open a Solo 401k?

Some of the discount brokers highlighted in my “how to start an online broker account” article have an Solo 401k option, but they are rare. Vanguard, Schwab, and Fidelity offer them. Always be sure to research minimum balance requirements and any associated fees, including account maintenance or inactivity fees before creating your account.

Investment offerings available for Solo 401k’s can vary as well, per broker. And some may not offer a Roth option. So do your homework.

Any Other Considerations to be Aware of?

One notable downside to Solo 401k’s is that they can require more paperwork and administrative responsibilities than IRA’s. You are generally required to file an annual report on IRS Form 5500-SF if your Solo 401k has $250,000 or more in assets at the end of the year.

Other Solo 401k Resources:

If you have any questions, definitely consult with a tax professional and/or a brokerage firm.

Outside of the Solo 401k resources highlighted earlier, you should also check out the following articles:

Solo 401k Discussion:

  • Have you opened a Solo 401k? If so, why?
  • Who is your broker?
  • What Solo 401k tips do you have?

About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


2 Comments »
  • Money Badger says:

    Owner K is another name. You covered a lot, but worth mentioning are costs associated with any 401k are going to be higher than any of the IRA options. Quite a few variables, but comparatively will be much higher to setup and maintain. Also, is the fact that you now have to fall under ERISA guidelines and the DOL/IRS keeps a much closer eye on the compliance of 401k plans than IRAs, so the risk of audit, investigation and/or subsequent penalties and headaches can be much greater if you don’t know what you’re doing.

  • sbb says:

    I set up a self 401(k) in 2009 and have been contributing ever since. For me, while the previous comment may or may not be right about fees that issue is far outweighed by this method to create an investment vehicle while I work independently.

    A lot of my friends wonder about 401(k)s when they are asking about working independently and are surprised to hear that I have one and how large is the yearly contribution max. It’s a great thing.

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