Best Solo 401(k) Plan for You: Self or Fully Administered?
If you’re self-employed or have an owner-only business, you too can set up a 401(k) plan. It’s called a Solo 401(k) and it enables any owner-only business without employees to take full advantage of the high contribution limits and tax savings a 401(k) plan offers. In fact, you can shelter up to $69,000 from taxes in 2024 – $76,500K if you are 50+ years of age. That’s some pretty powerful savings and might even drop you a tax bracket.
Once you know you want to start a Solo 401(k), there is an important decision to make. Which Solo 401(k) solution best fits your needs? There are two core solutions for individual 401(k) plans:
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Self-administered 401(k) plan
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Fully administered 401(k) plan
Self-administered 401(k) plans:
A self-administered 401(k) typically has a lower setup price versus a fully administered plan, and a much lower monthly or quarterly account service charge. However, it will have fewer features as it won’t likely enable a 401(k) loan, won’t allow for multiple owners and/or your spouse to participate, and may not include the Roth 401(k) option either.
Self-administered plan costs will be dependent on whether you want a curated fund line-up and/or model portfolios like a typical 401(k) plan (these benefit from experts bringing high-quality options from which you choose), or if you want the ability to use a self-directed brokerage window to pick stocks, bonds, or funds from the thousands of stock, bond, and funds available in the market. Typically, the latter can be a good fit for a sophisticated investor who has time to consider many investment options available, and the former is good for those that are too busy or are not investing pros.
If you prefer a self-directed brokerage window, there may be costs for adding funds or other brokerage or transaction fees for every trade you make. Self-administered 401(k) plans with a curated investment offering, as well as most fully administered plans, do not tend to have these costs as most are covered with either monthly account service and/or investment management charges.
Fully administered 401(k) plans:
The fully administered plan includes a plan administrator that makes it simpler to manage your contributions and stay within the employee and employer contribution limits for the year. Do know the administrator is not privy to your earnings to determine how much you can contribute as an employer. For 2024, $69,000 is the total 401(k) limit between employer and employee contributions. As an employer, your contribution amount is based on calculations that will typically be 20%-25% of your earnings. The employee contribution limit of $23,000 has no calculations to manage, you just need to ensure you don’t exceed it if your provider doesn’t provide guardrails.
A fully administered Solo 401(k) is generally easier to convert to a 401(k) plan that can accommodate employees if you plan on hiring employees at some point. Also, it is of importance to know in either scenario, you are both the employer and employee of your Solo 401(k), and as the employer you are responsible for managing how your plan is run.
Comparing Solo 401(k) Solutions
| Features / Pricing | Self-Administered | Fully Administered |
|---|---|---|
| Supports multiple owners and/or spouse | ||
| Roth 401(k) Option | ||
| Loan Option | ||
| Tax Form 5500 Preparation (required for $250K+ balanced) | ||
| Transaction Fees | ||
| Setup | ||
| Monthly Administration or Account Service (may be charged annually or quarterly) | ||
| Investment Options | ||
| User Experience |
If you are self-employed for the foreseeable future and don’t need access to a 401(k) loan, a self-administered solo 401(k) can cost less to setup, be easier to manage, and offer a simpler digital experience.
If you expect to add employees in the next year, have multiple owners, or want to include your spouse, a fully administered plan is likely a better fit. Also, if you ever think you may need access to funds via a penalty-free 401(k) loan, a fully administered plan is the one for you.
Give us a call if you need help deciding. We offer both options.
Key Takeaways:
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Solo 401(k) plans are available to self-employed and owner-only businesses and can include a spouse (or spouses, if there is more than one-owner of the company). These plans offer high contributions and tax advantages just like those for other businesses.
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The company cannot have any employees to take advantage of a Solo 401(k) plan.
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There are self-administered and fully administered Solo 401(k) solutions.
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Self-administered plans tend to be lower cost in regard to setup and administration or account services but may have other transaction and funds costs. They also tend to have less guardrails and less features than a fully administered plan.
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A fully administered Solo 401(k) can support multiple owners, 401(k) loans, and more.
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If you are a sophisticated investor and prefer a self-directed brokerage window to invest in the broad array of market options, this is more common in self-administered solutions. self-administered 401(k) solutions may be best for you. If you are too busy or aren’t confident enough to choose your own investments, a fully administered plan may be the way to go.
This is not meant to be tax advice. ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.