If you’re self-employed or an owner-only business, you too can have a 401(k) plan. It’s called a Solo 401(k) and it enables you to take full advantage of the flexibility a 401(k) plan offers. In fact, you can shelter up to $69,000 from 2024 taxes – $76,500 if you are 50+ years of age. That’s pretty powerful 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 type? There are typically two types of individual 401(k) plans to consider:
- Self-administered 401(k) plan -- also referred to as a self-directed 401(k)
- Fully administered 401(k) Plan
A self-administered 401(k) typically has a lower setup price versus a fully administered plan. However, it may have transaction fees for every trade you make as well as other fees that are often included in the fully administered version. A self-directed 401(k) plan can offer a lot of investment choices of stocks, bonds, mutual funds, and ETFs similar to a retail brokerage account.
Fully administered plans tend to have a set line-up of diversified funds like 401(k) plans designed for businesses with employees. A fully administered Solo 401(k) is also generally easier to convert to a 401(k) plan that can accommodate employees if you plan to start hiring.
This chart can make it a bit easier to determine which is right for you:
| Features / Pricing | Self-Administered | Fully Administered |
|---|---|---|
| Supports multiple owners and/or spouse | No, unlikely | Yes |
| Roth 401(k) Option | Some | Yes |
| Loan Option | No, unlikely | Yes |
| Tax Form 5500 Preparation (required for $250K+ balanced) | Not included, $200+ fee typical if you use a tax specialist | Included, $0 |
| Transaction Fees | Yes, per mutual fund or trading charge is common | No, $0 |
| Setup | $0 - $50 is common | <$250 is common |
| Monthly Administration (may be charged annually or quarterly) |
$0 to $10 is typical | $0-$25 per owner (money balance helps lower) |
| Investment Options | Large Selection, Sophisticated Investors | 15-25 diversified funds |
So if you expect to add employees in the next year or have multiple owners now, a fully administered plan is likely a better fit. If you ever think you may need access to funds via a penalty-free loan or want to take advantage of Roth contributions; again, fully administered is likely better. If you prefer a slimmed down selection of investments tailored for long-term investing, a fully administered plan helps here too. Note, try to ensure the investments have fund expense ratios well below 1%.
If you are self-employed for the foreseeable future, a sophisticated investor that is happy managing your tax reporting and don’t need any of the other bells and whistles, a self-administered solo 401(k) is most likely the best fit for you.