Solo or individual 401ks are popular retirement accounts for freelancers and self-employed individuals. You may contribute up to $61,000 per year (2022) through employer and employee contributions. It also has attractive benefits like the ability to borrow from the account. You can establish both a Traditional and Roth version, giving you more flexibility and higher contribution limits than other options.
Learn more about Solo 401ks here .
Here is a step-by-step on setting up a Solo 401k if you are ready to get started.
Step 1: Qualify. An individual 401k follows similar rules to company-sponsored plans and is designed for self-employed individuals with no employees. The IRS permits the addition of your spouse to the account if they receive wages from the company.
Step 2: If you don’t have one already, get an EIN issued by the IRS.
Step 3: Standard or Self-directed? Standard accounts allow traditional stock market investments and can be opened at most financial institutions. However, if you want non-traditional assets such as real estate or commercial syndications, you need to self-directed Solo 401K through a company specializing in self-directed accounts.
Step 4: Choose a Solo 401k Plan Administrator. Not all companies deliver the same services or expertise. They also have varying fees and processes. It’s best to pick a company with experience in your preferred investments.
Consider the following:
- Type of investments permitted: The broker or custodian determines the investment options.
- Plan fees: Start at $50 and up, depending on the services required. Self-directed accounts cost more and typically come with set-up fees due to the increased complexity.
- Level of services: Plan administrators often maintain account records, file required IRS forms, administer benefits, track contributions, and fund investments.
Step 5: Set Up Plan Documents. The plan administrator will send an application or kit that includes the plan details and how to open and fund the new account.
The disclosures provide the information required to remain compliant with the IRS. Required forms include a general IRS disclosure detailing how the scheme works and the tax benefits. The plan particulars contain election and investment options. Then rights and responsibilities discuss employee and employer contributions, vesting schedules, and eligibility.
Step 6: Open the Account. You must choose a Traditional or Roth account (or both) based on the tax treatment you find most advantageous. Traditional accounts offer tax-deferred contributions with the immediate benefit of reducing taxable income. Roth contributions are not tax-deductible but grow tax-free.
You can open multiple trust accounts as part of a single Solo 401k. You may choose to have both a Traditional and Roth as part of your Solo 401k. If your spouse participates, each person must have their own trust accounts because the IRS does not allow you to co-mingle funds between spouses.
Step 7: Making Contributions. You may make a contribution or transfer balances from other retirement accounts to fund the account. The account rules do not change until the balance exceeds $250,000. At that time, you must begin filing Form 5500 annually.
Step 8: Meet Annual Filing and Contribution Deadlines. Although you can make contributions until the tax filing deadline, you must open the account by December 31 in the year you want to apply contributions. It is also critical to earmark contributions to the correct year to avoid conflicts with mandatory IRS reporting.
